Description
Hi, guys --
I don't think I'll get many chances to write up a stock that's up 8x from my initial entry point, bumping against all time highs and has a PE of ~1000 -- but as I pointed out during the discussion of the Amerco debt/preferred, this is a _very_ special situation. Even though the stock is up a lot, a superficially plausible case can be made for it to triple over the next year, and a more plausible case (which I'll be focusing on) can be made for a double over the next few years.
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First A Bit Of Background:
Amerco operates in three industries: Do-it-yourself moving, self-storage and insurance. US and Canadian residents are presumably familiar with the moving operations. Depending on how you want to slice it, Amerco is somewhere between the largest (including affiliates and managed locations) and fifth largest (owned only) operator of self-storage facilities in North America. The insurance business divides into Oxford, which provides life insurance, and RepWest, which provides property and casualty insurance to the U-Haul rental operations. The moving and storage businesses are exceptionally stable; Oxford is non-core and likely to be disposed; RepWest has susbtantially run off a bunch of bad non-U-Haul policies it wrote earlier in the century and should be a respectable contributor going forward.
A quick summary of the corporate structure:
Amerco, the parent
--U-Haul: Core. The heart of the enterprise.
--AREC: Core. Owns and manages U-Haul's real estate, including self-storage and truck rental facilities.
--RepWest: Core, but not that important unless it's writing bad policies. Self-insurer for U-Haul's moving operations.
--Oxford: Non-core, although it administers the health and dental plans for the company.
--SACH: Core, but non-consolidated. Owns a bunch of self-storage real estate. Owes money and RE upside to Amerco.
Two things you should really know about are the bankruptcy and the Shoens.
Leonard Shoen founded U-Haul in 1945. In addition to his business activities, he was busy in other ways, having 14 children with three different wives. He generously gave voting stock to all his children. Then things got really ugly. The Shoens seem a litigious bunch, so I don't want to get into too much detail -- let's just say that Googling for "Shoen UHaul murder suicide" should be part of your due diligence. "Shoen UHaul lawsuit" is another good one.
The bankruptcy is also a long story. Briefly, a series of restatements and late filings spooked Amerco's creditors, leading to a liquidity crisis. The restatements and late filings were caused by SAC Holdings, a special purpose entity created to take real estate and the associated debt off Amerco's balance sheet. SPE's require a 3% equity participation from an outsider. SACH was defective in two ways: (1) The equity was held by Marc Shoen, an Amerco shareholder, officer and brother of the chairman, who is certainly not an outsider, and (2) The outsider is required to _maintain_ 3% equity; Marc apparently only put in 3% of the initial capital. This all happened right after Enron went down. Given the understandable skittishness about SPEs and companies that couldn't get their auditors to sign off on their financials, Amerco was unable to roll over its debt and had to go into Chapter 11. They spent nine months in the penalty box, emerging in March of this year.
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A Superficially Plausible Case For A Triple:
UHAL winds up around $120/share if EBITDA gets to $350MM and it trades at 10x EBITDA.
Can EBITDA Hit $350MM?
Yes, it could. I've got the company down for $250MM core EBITDA (U-Haul & AREC only) in '04 (Fiscal year ends in Q1). The company claims $275MM in "unadjusted EBITDA", so we're in the same ballpark. Add back about $65MM in non-recurring items (the bankruptcy, RepWest losses, etc.) Chuck in a bit of growth from inflation and maturation of newer assets (in particular, better occupancy at some self-storage centers), actual earnings from RepWest (historically $16MM-$20MM) and you're there or close.
Could Amerco Trade at 10x EBITDA?
Maybe. The company is really in the self-storage and DIY moving businesses -- the insurance lines are a side-show. 10x EBITDA is _cheap_ for a self-storage company. On the moving side, 10x EBITDA is reasonable for a non-cyclical business with a well-known brand and a moat. U-Haul is certainly a well-known brand. It does have competitors, although I don't think many could name both (answer given below), but I don't see any new entrants, because of the existing players and the capital required to establish a brand and acheive nationwide scale. U-Haul is the biggest and best known of the incumbents. Let's call that a moat.
The Calculation:
10 * $350MM =
3,500MM EV - $750MM debt - $150MM preferred =
2,600MM Equity Value / 21MM shares =
$123/share.
(The competitors are Budget and Penske. If there's anyone else out there doing consumer one-way rental, let me know.)
So there's some upside here, although frankly, I'm not counting on UHAL hitting 10x EBITDA in 12-18 months. I put this outcome in the same category as COS_u trading at 20x cashflow: Maybe it will trade there, maybe it _should_ trade there, but it in either case I'd be long gone. Which brings us to:
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A More Plausible Case For A Double Over The Next Few Years:
Let's put on our Marty Whitman hats and explore the company's "readily ascertainable net asset value".
I: Book is at $25/share. The main components of book are:
A: The insurance subs, where I admit to being out of my depth. Let's say that Ofxord is worth book because it's a life insurance company and life insurance companies are worth book. RepWest may still have some non-U-haul obligations (e.g., they're on the hook for $5-$6MM from the hurricanes, and the State of Florida is requiring them to renew their policies there). On the other hand, their U-Haul business probably deserves a premium because they get captive customers.
B: U-Haul: The truck fleet is the main asset at $1.25B. I don't know how you get comfortable with this number other than by personal inspection. U-Haul's annual depreciation is about 1/12th the value of its fleet, vs. about 1/5th for Ryder. But Ryder's fleet is in heavy service every day while a lot of U-Haul's is just sitting on a lot waiting for the weekend or end-of-month customer. U-Haul reports gain/loss on sale of trucks, which is intended and does come out to about zero, which supports the valuation of the fleet. For what it's worth, management claimed in a conference call that the trucks were worth $100MM over book.
C: Real estate, which is worth more than book; see below.
I'd tend to give Amerco's book values more credence than usual because the company has just been through the wringer of bankruptcy. Their books have been subjected to scrutiny by the courts and adversarial lawyers and accountants. If ever there's been a time for management to take that little write-down that's been in the back of their minds, this has been it. I think that reported values are solid.
II: Real estate is worth a lot more than book. The new lenders had Amerco's "wholly owned and unencumbered" RE appraised at $1.1B, or $26/share more than carrying value of $500MM.
Readily ascertainable net asset value, then, is $51/share. Other sources of value that are harder to quantify are:
1: Increase in RE value since the appraisal. I'll put this at $4/share.
2: Excess of market over carrying value for real estate that wasn't "wholly owned and unencumbered". I have no way to quanitfy this; let's call it $0-$5.
3: Participation in SACH. Things were originally set up so that Amerco had a 90% economic interest in SPE real estate. As a result of the bankruptcy, about half of the notes due to Amerco were restructured to the creditors. My guesswork based on cashflow vs. comps and also on asset values is that SACH is worth $120MM-$140MM. If Amerco gets between 0%-45% of the action, SACH represents another $0-$3/share.
4: The lawsuit. Amerco is suing PwC, who advised, signed off on and audited the SACH arrangement, for $2.5B. I am not a lawyer. I have no idea if they will win, because I am not a lawyer. But even though I am not a lawyer, it's clear to me that PwC was completely wrong and grossly incompetent. Amerco can easily point to $100MM in direct damages. They could argue, based on the bottom for their debt & equity securities, for $1B in damages. From what I know, if I were a judge, I'd decide in their favor and give them $100MM damages + $200MM punitive. We'll call the lawsuit worth $0-$60/share.
5: The franchise. The brand. Goodwill. The moat. All those trucks are worth more because of the white-and-orange paint jobs, and all those storage centers are worth more because they're just across the street from lots filled with white-and-orange trucks. Shall we say $0-$20?
So RANAV plus not-so-readily-ascertainable-NAV is between $55 and $139/share. I'll settle for $60. And that $60 is likely to grow by more than 10%/year for next few years. The company has reduced debt by $165MM since emerging from bankrupcy. Assuming $105MM annual debt reduction going forward, modest real estate appreciation (2% year) get us $6/share. The debt reduction also has salubrious effects on the bottom line. Current run-rate interest expense is $3.60/year, and the company has debt at 9% and 12%. It's interesting that the 12% notes are secured by, among other things, proceeds from the PwC lawsuit. There's also some room for multiple expansion. Amerco will be less capital-intensive going forward by relying on affiliates for storage and truck center expansion.
$60 + 3 years of 10% value increases gets us to $80/share. As a reality check, 7x $350MM EBITDA - $800MM in debt and preferred is $78.
To sum up: At $39, it looks like UHAL is trading at 65% of a conservative estimate of IV. If the share price just tracks projected value increases, returns are about 15%/year. If the discount to IV narrows, one can do a lot better.
All of which sounds good, but what about the Shoens, who are the reasons why the stock is trading at a discount to begin with? Honestly, I made the same valuation arguments in private correspondence last year, but the Shoens kept me from buying more at $10, or $20, or $30. This may sound like momentum investing, but at ~$40, it looks to me like the Shoen discount is going to continue to narrow. No matter what you think of management, they seem to have done a decent job with the moving operations and I actually like the leveraged self-storage strategy. Over the next few years they have nothing better to do than to pay down debt and keep their names out of the headlines. They've been showing up at investor conferences and not sounding like idiots or demons. Memories are short. In a couple of years, people might be calling these guys geniuses for the dramatic turn-around and pulling the company back from the brink, etc.
Disclosure: I bought this at $5. It's now my fourth largest position (which should tell you what a wuss I when I was first buying it). I've recently increased my holdings by 10%. For a variety of reasons I'm unlikely to add tons more at the current price.
A Note On The EBITDA Multiples I've Been Throwing Around:
The moving business is hard to figure because depending on your point of view you could call it either truck leasing (4-6x EBITDA sounds good) or one of America's best known consumer non-cyclical brands (10-12x isn't out of line). Averaging the bottom end gets us 7x, with a bit of comfort from the self-storage operations which trade at much higher multiples.
Risks:
-The financials are complex. I may be missing some important part of the story.
-The company is indebted. But debt to asset value is moderate, and the core businesses are steady.
-Management has been involved in significant and questionable related-party dealings. These are unlikely to recur.
Catalysts:
-Debt reduction.
-PwC lawsuit
-Narrowing of the management discount.
Catalyst
-Debt reduction.
-PwC lawsuit
-Narrowing of the management discount.