Description

Thesis Summary

AMERCO (“UHAL”) is the parent company of U-Haul. AMERCO current trades for ~$350/share ($6.8b market cap), which translates to ~40x earnings on 2022 estimates. We believe that UHAL is a quintessential short propped up by a sleepy investor base. The thesis is two-fold: (i) UHAL’s core truck rental business is facing increasing competition, and (ii) UHAL is attempting to differentiate itself by expanding into self-storage, which is facing significant oversupply.

UHAL “Old World” Self-Moving Model Under Threat

We have reason to believe that the core equipment business is suffering as a result of a more competitive rate environment. This issue predates the Coronavirus pandemic.

The company groups both self-moving and self-storage EBIT, but breaks out the individual revenue streams. We make assumptions on the contribution margin on each revenue line, based on peers and parsing through transcripts. Details aside, the direction of travel is undeniable – the core equipment rental business is getting less valuable by the year;

For a rental equipment business to generate value, it must grow its fleet at sustainable ROAs. In this instance, each year UHAL will be replenishing its fleet at lower returns. The implication is that the value of this business is at best the book value of its fleet, with a legitimate argument that it should trade at a slight discount.

We think there are two reasons why the truck rental business will be in secular decline.  

First, we believe that UHAL is operating an increasingly antiquated business model. The company generates 50% of its revenues from a network of 20k dealer-owned stores (e.g. small businesses like a gas station) that can house vans in return for a 20% sales commission. But UHAL’s largest competitors are all moving away from this model and towards self-service. For instance, in 2019 Budget Truck partnered with Fetch. Under the agreement, Budget Truck will make its trucks available for customers through the Fetch app. Our research suggests that Fetch is at least 25% cheaper than UHAL in the cities that it operates in. Budget intends on growing its fleet availability through this partnership. Essentially, the self-service model is disintermediating the traditional distribution model and passing those savings on to the consumer. It follows that UHAL has to price its services accordingly, and this is clear to see in the contribution margins. 

Second, we think there’s secular shift in the home moving industry. Whilst self-service is the short-term change, we believe there are a number of companies that are providing on-demand turnkey services. Companies such as Bellhops (link) and Moved (link) provide ‘concierge’ services at the touch of a button on an app. Sequoia-backed Clutter (link) provides on-demand self-storage without the customer ever visiting a self-storage facility. 

Today, therefore, a customer can choose low-cost self-serve or premium convenience. UHAL’s equipment rental business is none of these. 

UHAL’s Adding Self-Storage Rooms at Worsening Economics

In an attempt to differentiate its self-moving business, the company has decided to significantly grow its self-storage exposure. Over the last six years, UHAL’s square footage has more  than doubled from 18m sq. ft. to 42m sq. ft. The company’s reported occupancy rate has been in decline every year since 2016;

If we assume that the 2014 cohort occupancy is stable at ~81%, then this implied that UHAL added rooms at an incremental 58% occupancy rate. 

There’s good reason for this – the industry is suffering from a glut of oversupply. We summarise the industry situation in the following graphic;

UHAL decided to expand into self-storage at a time when the unit economics were at unprecedented highs. It’s no coincidence that there’s been a degradation of economics in the period from 2017 to-date. The large REITS (CUBE, PSA, EXR) have all contended that oversupply will continue into next year. Given the cumulative effects of this glut, we believe that UHAL’s expansion has been ill-timed.

Conclusion

UHAL trades at 1.7x book value and 40x earnings. We think these are robust multiples for a business facing structural pressures in its two core businesses. As the company continues to report sustained lower margins on the self-moving business and worsening economics in self-storage, the multiples will follow. Our fair value for the stock is closer to $200, for a (40%) downside to the current price.

Catalyst

• Deteriorating margins and ROA
• High leverage combined with falling earnings cause solvency fears