In mid-February, we shared our research report on AMERCO (NASDAQ:UHAL), the deeply undervalued and underfollowed holding company that owns U-Haul, the nation’s dominant moving equipment rental company. At the time of our report, we outlined why investors could have acquired AMERCO for only 11x EPS despite the fact that its U-Haul truck rental business has a dominant and unassailable competitive lead in its niche industry, is earning record profits, and is taking market share as a result of its lower cost base, larger fleet and expanding network. In addition, we also highlighted how investors may have overlooked the fact that AMERCO (NASDAQ:UHAL) generates nearly 30% of its free cash flow from its very valuable and steady self-storage real estate portfolio.
We wanted to provide investors with an update following the dissemination of our original report. Recent financial results and industry commentary continue to validate our thesis: U-Haul’s expanding fleet size and vastly larger network is expanding its competitive advantage in the self-moving truck rental market, forcing competitors such as Budget Truck Rental (a division of Avis Budget Group Inc. (NASDAQ:CAR)) to retrench from the market.
Recent Industry Commentary Continues to Validate Our Thesis
We think investors should not overlook the fact that AMERCO (NASDAQ:UHAL) has been run by the Shoen family, which founded the company, for nearly 70 years, and that 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 continuously enhanced U-Haul’s competitive advantage and market share at the expense of its competitors.
U-Haul’s primary competitors, Budget Truck Rental and Penske Truck Rental (a division of Penske Truck Leasing), are both divisions of far larger companies and not core profit drivers for their respective management teams. It is telling that on the Q4 conference call for Avis Budget Group Inc. (NASDAQ:CAR), management indicated further retrenchment:
“I think there are significant opportunities in Truck, but they’re longer term in nature. As we talked about last quarter and as I mentioned today, we are in the process of repositioning that business to be a somewhat smaller, and hopefully, more profitable business over time. That process is going to take at least the first 6 or 9 months of 2013 and possibly close to the entire year… and clearly, at this point, it does only represent around 6% of our revenue.”
It is interesting to note how management waves off the issues with the truck business by stating that it’s “only” 6% of their revenue.
We believe Budget’s attempts to downsize will facilitate further market share gains for U-Haul. Budget’s retrenchment has given U-Haul an opportunity to add even more trucks and locations to its already larger fleet and network. We believe Budget’s retrenchment demonstrates that competitors are finding it increasingly difficult to profitably compete with U-Haul.
AMERCO Continues to Report Record Financial Results
After we issued our report on AMERCO (NASDAQ:UHAL) in mid-February, the Company issued its Q3 results for the period ending December 31, 2012 (AMERCO’s fiscal year ends on March 31, 2013). Management has continued to execute in all lines of its business. EPS growth was an impressive 15% for the quarter on the back of 5% revenue growth in the U-Haul segment and 15% revenue growth in the self-storage segment. EBIT margins continue to be strong as U-Haul captures market share and competitors retrench.
The core U-Haul rental business achieved a 5% increase in revenue and leveraged its fixed cost base to generate an 11% increase in income contribution from the U-Haul division.