From a competitive perspective, U-Haul can utilize its increased profits to invest even further in fleet size and to increase its network, or it can choose to invest in lower prices to put even further pressure on Budget and Penske. Either way, its competitive advantage is continuing to widen. U-Haul’s financial results contrast significantly with the most recent results reported by Budget, which outlined that its truck rental business was facing a significant decline in profitability and that it was shrinking its fleet size:
“Revenue in our Truck Rental segment was up 1%, as a 4% increase in pricing and higher ancillary revenues more than offset a 3% decline in volume. Adjusted EBITDA declined $6 million, primarily due to higher maintenance, insurance and fleet costs. As we previously discussed, the results in our Truck Rental segment reflect costs we are incurring to reposition this business, which over time will include a reduction in our fleet size. This strategic repositioning will impact reported results for this segment for much of 2013 as well.”
The self-storage business continues to generate stable, predictable profits. AMERCO (NASDAQ:UHAL) was able to invest in another 0.6 million square feet of storage space while maintaining its high occupancy levels (80%).
The insurance business is a relatively small business unit. After deciding to run off non-core insurance lines, management will focus Repwest on its small but profitable niche of insuring U-Haul truck rentals. Meanwhile, the Oxford life insurance business continues to perform well.
Valuation Remains Attractive for Such a Dominant Business
We continue to believe fair value for AMERCO shares to be higher than $200. Below are current capitalization and valuation metrics for UHAL.
We compare AMERCO (NASDAQ:UHAL) to a selected number of publicly traded companies that operate a similar rental model, or benefit from “network effects” where incremental hubs / customers benefit the market leader.
Compared to these comparable companies, AMERCO is significantly undervalued when considering that it generates a higher EBIT margin than most of these companies, is arguably in a more dominant competitive position, and has a large real estate business. As it pertains to U-Haul, we think Waste Management, Inc. (NYSE:WM), Republic Services, Inc. (NYSE:RSG) and SYSCO Corporation (NYSE:SYY) are valuable comparisons in that they are high fixed-cost businesses that operate in commoditized industries, operate across the US, and are expected to grow roughly in line with inflation. These businesses reasonably trade at ~8x EBITDA, 12x-14x EBIT and 17x-19x EPS.
