AMERCO (UHAL) Looks Promising Heading Into Earnings

In our opinion, AMERCO’s U-Haul business line has far superior economics to publicly traded car rental businesses such as Hertz Global Holdings, Inc. (NYSE:HTZ) and Avis Budget Group Inc. (NASDAQ:CAR). The car rental industry is relatively competitive whereas in its market niche, U-Haul is the clear market leader and has an expanding competitive advantage.

Furthermore, unlike its car rental peers, AMERCO (NASDAQ:UHAL) generates 30% of its cash flow from its valuable self-storage real estate portfolio. We believe that investors in self-storage REITs such as Public Storage (NYSE:PSA), Extra Space Storage, Inc. (NYSE:EXR), CubeSmart (NYSE:CUBE) and Sovran Self Storage Inc (NYSE:SSS) can achieve far superior risk-adjusted returns by purchasing shares in AMERCO relative to their REIT investments.

For a self-storage REIT investor, buying shares in AMERCO is akin to acquiring the third largest self-storage real estate portfolio in the US, while getting the nation’s dominant truck rental business at a large discount. If a REIT investor were to value AMERCO’s real estate at only 22x EBIT (a significant discount despite AMERCO’s taxes), this would value U-Haul’s truck rental operations at less than 2x EBIT.

It should be noted that although AMERCO does not pay a regular dividend yet, it does pay special dividends. Last year, its special dividend was $5.00 per share, nearly a 5% yield on the stock’s 2012 average trading price of $102.  We think that management’s track record of shareholder-friendly capital allocation policies will result in cash either being returned to investors or intelligently reinvested in AMERCO (NASDAQ:UHAL)’s promising business lines.

At current valuations, AMERCO shares trade at only 14x analysts’ estimate of 2013 EPS. AMERCO will be releasing its year-end results this week, and we expect the company will announce yet another record year for earnings. Furthermore, AMERCO could announce additional special dividends in 2013 given that the business continues to generate substantial free cash flow.

Disclosure: We are long shares of UHAL. Please click here to read full disclosures.