Summary
- UHAL is the leader of the North American DIY moving and storage industry. The company has established an impressive track record of revenue growth, return on equity, and shareholder equity.
- The company continues to build out its fleet of moving trucks, trailers, towable devices, and rental storage units to maintain its spot at the top of its industry.
- The company's ability to generate free cash flow is a concern as it's bounced up and down over the last decade.
Overview
AMERCO (UHAL) is a moving and storage company operating in the US and Canada. They offer a range of services, including truck and trailer rentals, portable storage units, self-storage spaces, and moving supplies. They also provide an online marketplace for consumers to connect with independent moving help providers and self-storage affiliates. UHAL organizes itself into three reportable segments which include Moving and Storage, Property and Casualty Insurance, and Life Insurance.
The Moving and Storage segment of the company offers rentals of trucks, trailers, portable storage units, specialty rental items, and self-storage spaces primarily for household movers. This segment also sells moving supplies, towing accessories, and propane. The company offers these products and services under the "U-Haul" name. UHAL has a fleet of 186,000 trucks, 128,000 trailers, and 46,000 towing devices, as well as 1,844 self-storage locations with over 876,000 units. This segment usually makes up 90%+ of the company's total revenue.
The Property and Casualty Insurance segment of the company provides loss adjusting and claims handling services and underwrites parts of the SafeMove, Safetow, SafeMove Plus, Safestore Mobile, and Safestor protection packages for U-Haul customers. The Life Insurance segment offers life and health insurance products through the direct sale and reinsurance of life insurance, Medicare supplement, and annuity policies. These two segments usually combine for roughly 10% of the company's total revenues.
Performance
UHAL has consistently reported solid revenue growth over the past decade. For fiscal 2021 the company reported $5.7 billion in revenue which represents an exceptional 26% growth year over year. Over the last ten years, UHAL has more than doubled its revenues, growing 124% during the period. UHAL's consistency over the last decade is even more impressive, as the company has never reported a single year of revenue declines.
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In terms of free cash flows, UHAL has reported mixed results over the years. In 2021, the company recorded $432 million in free cash flows, which was -31.43 lower than its 2020 free cash flow. The company's free cash flow has bounced up and down over the past decade, and the company even saw negative free cash flows in 2018 and 2019. This is a bad sign for investors because when a company reports negative free cash flow, it may signal financial strain and a lack of resources for the business to grow and meet its obligations.
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UHAL has a better track record of profitability. The company has averaged an 18.23% return on equity over the past decade and only three of these years fall under 15%, which occurred from 2018-2020. UHAL is achieving higher returns on equity than its peers. In 2021, the company produced an ROE of 17.32% which is 22.46% than the sector median .
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Turning to the company's balance sheet, UHAL has done an excellent job of increasing shareholder's equity, which currently stands at $6.31 billion. The company has increased shareholder's equity at a steady pace, recording an impressive overall growth of 378% over the last decade. Although, the company's debt is increasing at a similar pace, the company shouldn't have any difficulties paying its bills with an interest coverage ratio of 8.31.
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Overall, the company has demonstrated a strong history of financial success, aside from free cash flow. This impressive performance has driven the company's stock to reach new heights, as it has outperformed the S&P 500's total return by a significant margin over the past five years, leaving investors to wonder if UHAL's impressive track record can continue.
Outlook
UHAL's strategy is simple: To keep its top spot as the leader of the North American DIY moving and storage industry. The company plans on achieving this by providing a smooth and connected supply chain for the DIY market. The company will continue to leverage its strengths which include the U-Haul brand, a full lineup of moving and self-storage products and services, and its widespread locations to stay on top of the industry.
UHAL's main focus is to give its customers the best moving rental equipment, easy-to-access self-storage options, and portable moving and storage units along with all the related products and services they need to make their moving experience as easy as possible. The company is always looking to improve customer satisfaction and that means it'll look to add more rental equipment, storage units, and more independent dealers to its network.
It's important for UHAL to continue to expand its network. The more locations the company serves, the more it benefits from both one-way movers who need to pick up a trailer or truck from one location and drop it off at another and in-town movers who may only utilize one location.
The company's storage business is growing fast. In the most recent quarter , UHAL saw an increase of 64,000 occupied rooms compared to the same quarter last year. The company is adding new locations and has projects to expand its existing locations and increase occupancy levels. Over the past 12 months, the company added 5.4 million square feet of storage space, which brings the total to 53 million square feet. The company currently has another 5.8 million square feet in development and owns land which the company plans to develop for an additional 8.7 million square feet. Therefore, in the coming years, UHAL could increase its total rentable square feet by 27%.
Valuation
To estimate UHAL's intrinsic value, a comparative and discounted cash flow ("DCF") analyses will be used. The comparative analysis will consist of taking the highest, lowest, and median price-to-earnings ratios the market has paid for UHAL over the past five years and multiplying them by UHAL's consensus 2023 EPS estimate of $ 5.61 per share. As a bonus, the current sector median valuation of 21.43 will also be applied to UHAL's consensus 2023 EPS estimate for an additional scenario.
Scenario | P/E | Next Year Earnings Estimate | Intrinsic Value Estimate | % Change |
Bear Case | 7.51 | $5.61 | $42.13 | -38.69% |
5Y Median P/E | 13.96 | $5.61 | $78.32 | 13.96% |
Bull Case | 23.64 | $5.61 | $132.62 | 92.99% |
Sector Median Valuation | 14.86 | $5.61 | $83.36 | 21.31% |
On a comparative analysis, UHAL has a wide range of scenarios that can play out. Investors could realize an excellent 92.99% return if the market were bullish and applied the 23.64 multiple, seen in 2020, to next year's average analyst earnings estimate, should those estimates materialize. On the downside, investors could realize a significant -38.69% loss if the market were to value UHAL at the 5-year low multiple seen in October of 2018.
The most likely scenario is the base case, which is based on the 5-year median P/E ratio. This base case scenario would result in a 13.96% return for investors. The final scenario which is based on the sector median multiple results in a nice 21.31% gain. Altogether, this comparative analysis indicates that UHAL is slightly undervalued as of now.
Turning to the discounted cash flow analysis, the starting point will be the average of the last five years of free cash flows, which is $101 million. Then a 7% growth rate will be applied to the free cash flows for the next ten years. This growth rate is based on rule 72 which states a 7% growth rate will take just over ten years to double the original value. This is a reasonable amount of time for UHAL to double its free cash flows, based on a combination of the company's past performance and future growth opportunities.
Following the 10th year, a 2.5% growth rate will be used into perpetuity to determine the terminal value. A discount rate of 10% will be used, representing my personal required rate of return. With these inputs, the DCF analysis estimates UHAL's intrinsic value is $95.56, representing an upside of 39.06% from the company's current share price.
Therefore, this DCF analysis indicates that UHAL is currently undervalued. However, if you are more bullish on UHAL, consider that this DCF analysis is heavily affected the two negative years of free cash the company reported in 2018 and 2019. If the company's 2021 free cash flow was used as the starting point instead, then UHAL's intrinsic value would be $410.88 per share, which represents an upside of 497.91%. I would be careful about these assumptions, however, especially since UHAL has reported -$171 million of free cash flow over the trailing 12 months.
Summary
UHAL is the leader of the North American DIY moving and storage industry. The company has established an impressive track record of revenue growth, return on equity, and shareholder equity growth. As a result, UHAL has outperformed the total return of the S&P 500 over the past five years by a wide margin. In addition, the company's future seems bright as it continues to build out its fleet of moving trucks, trailers, towable devices, and rental storage units to maintain its spot at the top of its industry.
However, I am a little concerned about the company's ability to produce free cash flow. In 2018 and 2019 the company reported negative free cash flows and is currently on track to report another year of negative free cash flows this year. Regardless, UHAL's stock is selling at a discount, but I'll rate this company a hold until I see a better track record of free cash flow growth.
Thank you for reading!
For further details see:
Amerco: An Industry Leader But Struggles To Produce Consistent FCF