One of Kerrisdale Capital’s biggest longs was Amerco (UHAL) from 2013-2015. We have taken a fresh look at the business and still believe the company is an attractive long. The stock has traded off given concerned about lower truck resale values and increased new truck pricing, however, we believe these concerns are overblown given the strength of the storage business.
Amerco is composed of three business segments, Moving, Storage, and Insurance. Amerco has focused on growing the owned storage business over the last 5 years. This business boasts EBIT margins of over 80%, as it requires very minimal capex and operating expenses. We believe the Storage business is a growing hidden gem within a complex consolidated company. Comparable storage REITs trade at over 20x EBITDA, and have higher occupancy rates, prices / sq. ft., and less of a competitive advantage than Amerco’s storage business. Amerco’s storage business is adding millions of new square footage each year, which makes occupancy levels appear lower than they actually are. When this square footage is filled, incremental revenues will fall straight to EBIT. Additionally, there are real synergies for the best in class moving business and owned storage facilities, which we believe will allow Amerco’s storage facilities to command similar if not higher pricing than competitor self storage REITs.
The bear case is that truck resale gains have been a large driver of earnings growth over the last few years, with gains of 33.5mm in 2014, $74mm in 2015, and $98mm in 2016. These gains came with used truck pricing increasing and Amerco turning over a larger percentage of their fleet per year. This, the shorts assert, combined with lower margins due to higher new truck pricing, will continue to cause Amerco to miss EPS estimates over the new few quarters.
We contend that the technicals in the use truck market are different than that of used cars and used machinery, and that Amerco’s growing storage business will more than offset these potentially lower used truck gains on sales in the coming years. Additionally, lower corporate taxe rates under the Trump Administration (potentially 20% vs. 36%), could make these lower margins negligible.
Currently, each 1% increase in storage occupancy rate increases annual revenue by $3.4mm, with almost all of this falling to EBIT. Amerco should be credited for occupancy rates around 90%, given they are only lower because the company is expanding the storage business and building new facilities. This combined with potentially increased pricing to an industry average (Amerco is over 10% below the industry average) and new storage space continuing to be built, we estimate storage revenue could be over $550mm by 2020, 87% higher than today. Perhaps lower resale values drag the stock lower in the next few quarters (most shorts we have spoken to simply cite lower resale values without data, rather than actual auction prices or data from equipment sites such as Machinio), but if the storage business continues its amazing growth, we will continue to add.
Additionally, we are looking into pulling rate data from the u-haul website by zipcode to monitor pricing trends. There is a fair amount of noise now but we believe it could be interesting and provide an early indicator to pricing trends.
For example, searching for storage in Manasas, Virginia using the following url (https://www.uhaul.com/Locations/Self-Storage-near-Manassas-VA-20110/795048/) yields the following options:
These prices correspond to $36, $38.40, $25.20, $27.60, and $19.80 / sq.ft. all much higher than the Amerco average of $13.93. We have built a crawler which monitors these prices for every location, allowing us to monitor general pricing trends in the storage business.
Update 4-3-2017 Even though we have argued that truck prices have different technicals than the used auto market, we advised exiting this trade off with the recent weakness in HTZ, bleak outlook for used autos, and delayed tax reform.
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