U-Haul: In it for the Long Haul
By: SumZero Staff | Published: February 13, 2017 | Be the First to Comment
It is pretty rare to drive somewhere and not spot at least one of Amerco’s (NASDAQ:UHAL) U-Haul trucks on the road. Stephen Saroki, an experienced analyst who is launching a long/short equity fund Anaxi Capital, believes the company’s competitive advantage coupled with its lack of coverage on the sell-side has created strong headwinds to propel the stock to new heights. More people are renting homes than ever which is creating a climate ideal for the moving and storage business. While many of its competitors are scaling back operations, Amerco is still expanding its already deeply entrenched network of truck rental and storage locations.
SumZero: What about Amerco (“UHAL”) initially caught your attention as a value investor?
Stephen Saroki: U-Haul is a great business with the dominant position in the “do-it-yourself” (DIY) moving space with a relatively low valuation. Its dominant position is primarily due to the strength of its nationwide network, which is a self-reinforcing moat. Being the only/lowest cost inter-city option for moving continually improves their dealer network, making it harder and harder for their competitors. Combined with this, their brand recognition and scale contribute to them having higher utilization for a given capital expenditure spend.
SumZero: What is the market missing?
Stephen Saroki: Despite the quality of their business, it became clear that U-Haul was undervalued for a number of reasons. Part of this is due to its tumultuous management history, which included lots of family infighting for control of the business along with the suicide of its founder, Leonard Shoen. Second, the business has very little sell-side coverage, which leads to people on the Street not knowing much about it. The market fails to recognize that the management issues which plagued them historically have not been an issue for a long, long time. In addition, the market is missing the value of their self-storage business, which is good in its own right, and likely benefits from the name recognition that the U-Haul brand offers.
SumZero: What key metrics should investors be paying attention to as your thesis matures?
Stephen Saroki: Including the standard operating metrics like EBITDA and EBIT margins, the real things to pay attention to are transactions (the number of truck/van rentals), the number of trucks that both U-Haul and their competitors have, along with the total number of locations that U-Haul has in relation to their competitors. It is my expectation that margins and transactions will increase over time, along with the equipment and locations disparity between U-Haul and its competitors. On the self-storage front, it is important to track what Amerco charges per occupied square foot. Their low rate, in relation to their competitors, has room for growth even in a crowded market.
SumZero: What are the biggest risks associated with the trade in your view?
Stephen Saroki: One of the great things about this business is that it is not particularly cyclical. Simply stated, there are reasons to move in both good and bad markets. More importantly, in bad markets, people are more cost sensitive which plays into U-Haul’s hands. The biggest risks, in my view, are truck resale values and self-storage supply. U-Haul is not as exposed to resale values as other rental industry players like Hertz and Avis Budget. While these car rental companies are turning over 1/3 to 1/2 of their fleet each year, U-Haul is only turning over ~10%. In addition, they have less urgency in turning over their truck inventory, and can wait for better prices if they aren’t favorable at the time. As for self-storage supply, while recent reports of oversupply are concerning, Amerco, which charges $13.84 per occupied square foot and should be the beneficiary in relation to companies like Public Storage which charge $17.06. Amerco will likely have less of an opportunity to increase price, but should be well positioned to gain share.
SumZero: What are Amerco’s biggest problems right now?
Stephen Saroki: The biggest issue for Amerco is their being unwilling to spin off their self-storage business as a REIT. If it were spun off, this portion of their business, whose value is not being recognized under the umbrella of Amerco’s equity, would get a premium REIT multiple along with the tax advantages that REITs enjoy. Despite this, Joe Shoen, their current CEO, has time and again stated that they will not be spinning off their self-storage business.
SumZero: What gives U-Haul such a competitive advantage over other competitors in the industry?
Stephen Saroki: U-Haul has a large moat in the form of a massive and substantially impenetrable network, strong brand equity, and scale. Their network grows due to the fact that it is already the only/lowest cost option for one-way moves. This, in turn, leads to growth in their independent dealer network, which benefits most from one-way moves. As the network grows, both their local product and one-way product benefit. This feeds into a self-reinforcing cycle that continually strengthens their network. On top of this, they are, and have long been, the most prominent name in the DIY space, with brand recognition that significantly outpaces their competitors. Finally, their scale, in combination with their network and brand equity, makes it difficult for anybody to take them head on. As a result, their biggest competitors, Budget specifically, are scaling back their operations.
SumZero: Considering the size of the company, why is there a lack of coverage on the sell-side and why are its trading multiples considerably lower than the median of its peers?
Stephen Saroki: It is clear that U-Haul is not a profit engine for investment banks. Due to high insider ownership, only 44% of its shares are part of the publicly traded float, with low average daily volume. In addition, it doesn’t engage in a lot of capital markets transactions. Finally, the management team is not promotional, as they tend not to attend Wall Street conferences. Despite this, as they grow, I expect that the bulge brackets will not be able to continue to ignore them.
SumZero: Does the increase of the Uber/Lyft business model pose risk for disruption of U-Haul Truck rental and self-storage?
Stephen Saroki: Certainly, for the intra-city (local) business, something like this could have an effect on U-Haul. However, there are a lot of caveats to this statement. First, pickup trucks and cargo vans represent a small portion of U-Haul’s local business. Second, this part of their business was already highly competitive in the first place. As a result, they don't have much pricing power in this space and already offer low prices as a result. In addition, this is dismissing the convenience of U-Haul's many locations. Beyond this, there are two important reasons why an Uber/Lyft style competitor won’t disrupt U-Haul’s business. First, they won't affect U-Haul’s local light-duty box truck business, which is the lion's share of their local business. This is because individuals generally don't own spare light-duty box trucks. Second, this will have no effect on their one-way business at all, because people aren’t going to rent their trucks for long-distance moves.
SumZero: The mover rate (how many people changed residences over a one-year period) has seen a serious decline in the past couple decades, and recently renting homes has been increasing compared to traditional home ownership. How has this influenced U-Haul’s business?
Stephen Saroki: While it is true that the mover rate has declined substantially over time, it is also true that U-Haul’s transaction numbers have risen in the process. In addition, in speaking with an academic who specializes in mover rates and after consulting the academic literature, it seems that there has been a flattening out of the mover rate, which should benefit U-Haul going forward. As for increased rental rates in relationship to home ownership, given that renters are twice as likely as homeowners to move, this change should lead to more moves. Finally, the reasons that people move are varied. This should allow Amerco to be successful in both good and bad markets, which should allow them to perform well even in times of recession.
SumZero: Are the strong ties of Amerco to the Shoen family a weakness or a strength, especially regarding past controversies?
Stephen Saroki: If this were 15 years ago, I would have considered the management controversies to be an ironclad reason for not investing in the business. The reality, however, is that the issues that existed at that time no longer exist today. Joe Shoen took over the business in 1986. After fixing what his father left in shambles, he has restored the business to its former position in the DIY moving space. This provides an opportunity for investors to own a business which is in fact good, but has reputational damage that will, over time, be ameliorated. Today, the high insider ownership of the Shoen family is a strength. Given their insider ownership and personal attachment to the business, they are focused on long-term appreciation of the value of the business, which is all a shareholder can ask for.
SumZero: Where else do you see value in the market today?
Stephen Saroki: Prior to the election, I thought the market was substantially overvalued, especially given declining earnings coupled with historically high valuation multiples. I think that the Trump bump has exacerbated these issues. Despite this, there are still great investment opportunities out there. At the top of my list is Hostess Brands (Nasdaq: TWNK). Recent investor memory regarding this business is clouded with Hostess’ two bankruptcies related to their pension liabilities. Dean Metropoulos and Apollo bought the sweet baked goods (SBG) business out of Chapter 7 bankruptcy, and turned it around. It went from a negative EBITDA margin business to a category leading ~30% EBITDA margin business. This was achieved by their transition from a direct-store-delivery (DSD) model to a direct-to-warehouse (DTW) model, which was enabled by a chemistry development which lengthened the shelf life of Hostess products from 26 days to 65 days. The DTW model allowed them to cut labor costs, outsourcing delivery to third-party trucking services. On top of this, they introduced substantial amounts of automation, which contributed to significant cost cuts as well. Now a lean operating machine, Hostess’ strong brand equity is leading its resurgence.
SumZero: How has your approach evolved over the years?
Stephen Saroki: The reality is that each project involves a reinventing of myself as an investor. Over time, I have come to more deeply understand what is important for a evaluating a business and what makes for a good business versus a bad one. This process refinement is what allows me to more optimally employ my time to find investment opportunities.
SumZero: Tell me about your investing background and investing mentors and heroes.
Stephen Saroki: I have long been interested in investing, but didn’t venture to do this professionally until recently. Immediately prior to beginning my investing career, I was in the seminary for four years studying for the Catholic priesthood. Discerning that this wasn’t my path in life, I moved back to finance, and specifically gravitated towards active investment management. As a former Ph. D. candidate in Finance at Duke University, I found the standard finance assumptions of investor rationality and market efficiency to be particularly unpalatable. In coming across the works of Warren Buffett and Seth Klarman, I found their assessments of finance to be more fitting given the evidence. And so, another value investor was born. In addition to being mentored by Sean Fieler, the President of Equinox Partners (for which I am very grateful), I found a job working as an investment analyst at a fund in New York City called Prima Pars Asset Management. Just recently, my colleague, Luis V. Sanchez, and I have decided to launch a long/short equity fund called Anaxi Capital.
SumZero: What advice would you give to someone interested in pursuing investing?
Stephen Saroki: Read, and then read some more. While most will focus on investing books, I would suggest reading 10-Ks first. Though considered a boring task, it is the best way to learn about businesses. As people begin to understand businesses and industries, they become better able to identify the patterns which reveal a business to be good. It is after doing this that people will benefit most from reading investing books.
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