We believe that AMERCO (“UHAL” or the “Company”) is highly undervalued. We are long the stock.
Our 30-page report explaining our long thesis for UHAL is available here [1].
AMERCO is an underfollowed holding company that owns one of America’s most ubiquitous businesses: U-Haul, the nation’s dominant do-it-yourself (“DIY”) moving company. For over 60 years, numerous well-financed competitors have tried, and failed, to encroach on U-Haul’s ever-growing lead in the DIY moving equipment rental market. Today, U-Haul controls its market niche, with more than 8x as many hubs as its nearest competitor, and is growing revenue and profit at a steady clip while gaining market share.
In addition to its vehicle rental operations, AMERCO also owns substantial real estate across the United States in the form of self-storage facilities. AMERCO’s real estate portfolio generates nearly 30% of the Company’s EBIT and if converted to a REIT, it would be the 3rd largest storage REIT in the US. AMERCO also owns a small and profitable insurance book (largely underwriting truck rental insurance). On a sum-of-the-parts basis, AMERCO’s assets offer a sizable floor value, particularly since its insurance and real estate assets can be sold to strategic buyers or spun out to shareholders at accretive valuations.
Yet despite the fact that UHAL is very likely to grow its cash flow consistently and significantly over the next 5, 10 and 20 years, AMERCO trades at an 11x price-to-earnings ratio, a significant discount to the S&P 500’s 15x price-to-earnings multiple. From an enterprise value perspective, the stock trades at 5x EV / EBITDA and 11x EV / Free Cash Flow. Given its considerable earnings power, stability and asset value, as well as its management team’s demonstrated willingness to return cash to shareholders, AMERCO deserves to trade at a premium to the overall market, in the 16x to 18x price-to-earnings multiple range.
As a result, we think AMERCO should be worth between $200 and $230 per share, compared to $145 today, implying 40% to 60% upside from today’s trading levels.
We believe this investment opportunity exists because AMERCO provides no earnings guidance, has a small float (the founding Shoen family retains 55% of the company), has little to no research coverage, and its amalgam of equipment rental, storage real estate and insurance businesses with no regular dividend leaves it an orphaned stock. However, now that AMERCO has resumed its share buybacks and special dividends ($1.00 in 2011, $5.00 in 2012, with the potential to launch a regular dividend soon), we believe the valuation disconnect will close as investors directly benefit from the steady and growing earnings power of AMERCO’s component businesses.
Below are key investment highlights for why we are long UHAL.
- U-Haul’s Competitive Advantages are Unassailable: U-Haul last faced a significant competitor 20 years ago, due to some managerial missteps, yet emerged in an even more dominant position. Today, on almost every metric of success in the DIY equipment rental business, U-Haul’s competitive advantage is not only significant, but widening. U-Haul is one of the most recognized brands in the United States. It has 8x as many locations and 4x as many vehicles as its nearest competitor, resulting in enhanced convenience for customers while providing a better value proposition to prospective franchisees. It offers numerous ancillary products and services that differentiate its service from competitors. As a result, U-Haul’s closest competitor, Budget Truck Rental, is retrenching, having reduced its truck count and announced restructuring measures over the past few years.
- High Insider Ownership and Competent Management: AMERCO has been run by the Shoen family for nearly 70 years and the family retains a 55% equity interest in the business. Current CEO Joe Shoen, son of founder Leonard Shoen, has run UHAL since 1986 and has managed operations with a long-term focus, continuously enhancing UHAL’s competitive advantages and consistently increasing market share at the expense of competitors. Shoen can be credited with fighting off Ryder Truck Rental, the last major competitive threat U-Haul faced, when he became Chairman in 1986. U-Haul’s numerous ancillary services demonstrate that management has proven adept at constantly adapting the company to take advantage of, and protect the business from, new trends, technologies and ways of doing business. Management wealth is primarily tied to the long-term value of the stock, not salary.
- Shareholder Friendly Capital Allocation Policies: Over the past few years, management has consistently adopted capital allocation policies that benefit shareholders. Since the recession, management has used Free Cash Flow to pay down debt and retire preferred stock, having reduced debt and preferreds by more than $300m since 2009. More recently, the company has returned cash to shareholders via special dividends, announcing a $1.00 special dividend in FY2012 followed by a $5.00 special dividend in FY2013. With its balance sheet now lush with liquidity, and annual earnings power in excess of $12.00 per share, AMERCO is in a very strong position to return significant capital to shareholders. Finally, management is focused on building out its core U-Haul business and although it regularly acquires small self-storage facilities and the occasional ancillary product provider, the company has refrained from any major acquisitions over the past five years.
- AMERCO Generates Nearly 30% of its Cash Flow from Self-Storage Real Estate: If converted to a REIT, AMERCO’s real estate portfolio would, as a standalone entity, be the 3rd largest self-storage REIT in the United States. Self-storage real estate receives high valuation multiples in the market because it has low maintenance costs, generates substantial cash flow, and, like parking lots, represents significant option value if the land can be converted to alternate uses (commercial or residential). We believe the cash flow stream from the real estate portfolio alone could be worth $80.00 to $100.00 per share.
- Deeply Discounted Valuation: Last, but not least, AMERCO’s shares are very obviously cheap. Despite having a dominant market position in a predictable industry that will almost certainly be larger 20 years from now, AMERCO shares trade at only 11x EPS, 5x EV / EBITDA and 11x EV / Free Cash Flow. Given the company’s leading and highly defensible market position, competent management, and intelligent capital allocation policies, we believe that the stock should be trading at a premium to the S&P 500’s current 15x multiple. A trailing P/E multiple of 16x to 18x would yield a stock price between $200.00 and $230.00 per share, between 40% and 60% above today’s trading levels.
Kerrrisdale Capital and our clients are long shares of AMERCO. We stand to benefit in the event of a price increase in UHAL, and will transact in the securities subsequent to this email. Please read our full disclaimer at the end of the report [2].