Description

The thesis on UHAL is as follows:

• The company is under-followed and has generally misunderstood financials.

• The core moving business is better than people commonly think, and better than other rental businesses (URI, HTZ, CAR, etc.).

• Earnings in fiscal 2017 were depressed from a significant jump in depreciation expense, as well as costs associated with new storage capacity that came online at little to no occupancy.

• The company has been investing aggressively in real estate that is set to provide significant earnings growth in coming years.

Despite being a household name and a $7b market cap, UHAL is generally misunderstood.  The main reasons for this are the significant family ownership (they never sell) and the fact that the stock is followed by one sell-side analyst at a small firm.  Historical financials can also be misleading without the right analysis, mainly regarding the use of operating leases, as well as depreciation practices.  I think it’s fair to say that management does not give much thought to GAAP earnings and instead run the business for cash earnings and returns; I believe this is evident in their depreciation and funding practices.

The core moving business is quite a good business given the relatively steady demand (my analysis shows that core moving EBITDAR only cycled down ~10% in the financial crisis), and competitive positioning (out-of-town moves create significant scale / network effect benefits).  Below is my model of the core moving business, which I derive from taking consolidated EBITDAR and then backing out the insurance operations and the self-storage business (more on that below).

In addition to being under-followed, GAAP financials in fiscal 2017 were depressed by a number of factors.  First, the company spent $755m in net fleet capex (vs $465m average for the previous 5yrs) re-fleeting their 26’ trucks.  The company uses accelerated depreciation, and in addition they not only changed the residual from 20% down to 15% a few years ago, but also started accelerating the depreciation of <$5k equipment this year.  As a result, depreciation expense was up significantly in fiscal 2017, causing an earnings decline.  Additionally, the company has ramped investments in self-storage over the past few years, and in particular the conversion and development programs over the past two years, resulting in significant costs ahead of future occupancy gains.

Related to this last point, over the next 3-5 years the company should see a material acceleration in earnings from the self-storage investments.  One can see that real estate capex has risen materially over the past several years, and this has pushed overall occupancy down in the short term (they’ve been doing new builds/conversions or buying at low occupancy).  On the fiscal Q4 call the company noted that they have an additional 6.5m of additional square feet that will be coming online (the majority of capital has already been spent), and more deals in escrow.  Using company disclosure, as well as estimates from pure self storage peers (PSA in particular has helpful disclosure), I model the self storage operations below.

Regarding valuation, I believe you can underwrite a mid-teens IRR using only an 8x TTM EBITDA exit multiple on UHAL.  I think this is a reasonable multiple for a good business with muted cyclicality / generally recurring revenues, with the business mix shifting towards storage where pure-play peers command premium valuation multiples.  I think it’s important to note that 1) the company’s rental business exhibits significantly better financial characteristics than other rental businesses, 2) self-storage earnings should ramp considerably over the next 3-5 years, and pure play self-storage companies command significantly higher valuation multiples, and 3) I model all excess cash flow going to debt paydown whereas in reality I expect the company to remain levered by continuing to consistently pay special dividends as they have done in the past.  As earnings from the storage business ramp I think it’s possible that the earnings multiple expands to reflect peer valuations for that business.

Catalyst

• Lapping tough depreciation comps
• Acceleration of storage earnings