2024-01-05 23:04:41 ET
Summary
- UHAL’s revenue, CFO, and EBITDA have grown at a healthy 8–9% during the last decade, with Capex investment positioning the company to maintain this level.
- It operates with an impressive EBITDA-M of 35%, as the company benefits heavily from its scale across the US and low marginal cost to deliver.
- UHAL has a strong business model, underpinned by a leading brand and a shrewd management team. Its revenue profile is increasingly becoming diversified, further increasing its quality.
- UHAL is outperforming its peers while investing more in growth (asset base), suggesting its outperformance could potentially widen.
- UHAL’s valuation is fair, particularly given the execution risk present, but we are hesitant to rate the business a buy yet given the macroeconomic environment.
Investment thesis
Our current investment thesis is:
- U-Haul's (UHAL) diversified revenue stream and strong business model positions it perfectly as a long-term compounder. The company has a strong asset base that is growing rapidly, alongside a market-leading position in the UK. We suspect it can continue to grow at a similar rate to historically achieved, while maintaining its EBITDA-M of ~35%.
- The company’s FCF position is not ideal for short-term actors but it is important to appreciate these are into hard assets and can be reduced aggressively if required. Cash flow from operations has grown in line with revenue, while many assets still need to ramp up.
- The only impediment currently faced is the timing of rate cuts and the potential of a recession, which given the imminent nature of either or both, we believe signals a hold rating.
Company description
U-Haul is a prominent player in the do-it-yourself moving industry, offering a comprehensive range of services including truck and trailer rentals, storage solutions, and packing supplies. Established in 1945, the company is headquartered in Phoenix, Arizona, and has grown into one of the largest and most recognized names in the moving and storage business.
Share price
UHAL’s share price performance has been strong since it was listed, gaining over 20% at a time when the wider market has broadly traded flat, particularly when considering this is heavily weighted toward the magnificent 7.
Financial analysis
Presented above are UHAL’s financial results.
Revenue & Commercial Factors
UHAL has generated impressive growth during the last decade, with a CAGR of +8% into the LTM period. In conjunction with this, its EBITDA-M has broadly traded flat.
Business Model
UHAL primarily operates in the equipment rental industry (~69% of FY22 revenue), offering a wide range of products such as trucks, trailers, and towing equipment. Customers rent these items for transporting goods during relocation, with the company having a long history with this segment and a recognizable brand that is highly visible on its vehicles.
In addition to moving equipment, UHAL is increasingly expanding its storage solutions through a network of self-storage facilities (~11% of FY22 revenue). Customers can rent storage units for short-term or long-term needs, positioned to act as an additional revenue stream with reduced cyclicality.
UHAL pioneered the concept of DIY moving, empowering customers to handle their relocations independently. This concept appeals to individuals seeking a cost-effective and flexible moving solution, with UHAL remaining the most cost-effective and flexible option in the market given its national asset base and scale across the US.
U-Haul aims to be a one-stop-shop for customers during the moving process. Beyond truck and trailer rentals, the company offers a range of additional services, which together (alongside investment and interest income) comprise ~20% of FY22 revenue.
Competitive Positioning
UHAL’s strong competitive position is based on the following key factors:
- Scale - UHAL has a significant scale across the US, both in the locations it services and the number of available assets for consumers. UHAL has over 180k trucks, 120k trailers, 46k towing devices, and 58k sqft of storage space. This is critical to creating a network effect. For example, a consumer can transit products across the US and likely has the option to drop off its rented vehicle at another UHAL location, minimizing the costs to UHAL and thus the price it charges.
- Marketing and Branding - UHAL's marketing efforts and strong branding contribute to visibility. This is critical as in many cases, consumers will have limited knowledge of quality and so will seek well-known and respected brands when making a choice.
- Adaptation to Market Trends - UHAL has adapted to market trends and technological advancements. Online reservations and digital tools, as an example, enhance the customer experience. This has staved off competition and similar technology-driven innovation in other industries.
- Innovation in Services - The introduction of additional services, such as storage solutions and moving help, diversifies UHAL's offerings by making the life of its (potential) customer easier. This innovation allows the company to cater to a broader range of customer needs and is a level of differentiation that many local players cannot compete with.
- Strategic Location Placement - UHAL’s financial resources have allowed it to strategically position its locations, often in proximity to residential areas and moving hotspots, ensuring that customers can easily access its services.
Mobility Industry
UHAL competes with Penske Truck Leasing, Budget Truck Rental, and Enterprise Truck Rental, alongside many local players in what is a fairly fragmented industry.
Competition Dynamics revolve around the following factors:
- Pricing and rental terms.
- Fleet size and distribution network.
- Customer service and satisfaction.
From the analysis above, and general customer feedback analyzed, UHAL is certainly a market-leading player that is importantly not losing sight of the simple things it needs to do well to keep its customers happy.
Key industry trends include:
- Remote Work Impact - Shifting patterns in moving due to remote work has the potential to contribute to greater migration from larger cities and states outward.
- Broader Mobility Trends - Societal trends, such as increased mobility and relocations, contribute to a consistent demand for UHAL's services.
- Sustainability - UHAL is investing heavily in the modernization and expansion of its fleet (discussed in detail later), although Management must consider the need to transition to clean energy in the not-to-distant future and the associated cost profile to do so.
- Digital Integration - Further technology and digital integration, such as in smart reservations (potential for AI-managed stock to smartly allocate assets to locations) and customer service, has the potential to streamline operations and asset management to maximize returns.
- Financing environment - The current financing environment will make it difficult for businesses to expand their fleet / storage capacity. Although this is a potential issue for UHAL, the business is likely one of the best-placed in the industry, thus creating the potential for market share growth.
Margins
UHAL’s margins have been flat for the last decade, implying new product launches and changes in the mix have been neutral at a minimum. Given that EBITDA-M is a cool 35%, this is an impressive achievement.
It is worth highlighting that the company has considerable D&A expenses given its asset-heavy nature (~10% of revenue), however, these are only accounting costs with no associated cash impact, allowing for a cash flow from operations (”CFO”) margin of 26%.
Looking ahead, we suspect UHAL can maintain this current level at a minimum, although has scope for appreciation if investment in modern assets can improve unit economics.
Quarterly results
UHAL’s top-line revenue growth has materially slowed in recent quarters, with growth of (2.1)%, (0.8)%, (3.6)%, and (3.1)% in its last four quarters. Importantly, however, margins have yet to stabilize, implying further decline is possible.
The company’s decline is almost wholly attributable to its rental segment, as the storage segment continues to grow well while occupancy exceeds 80%. The rental business has a degree of cyclicality associated with the health of the housing market, as consumers primarily demand mobility services when acquiring a new home.
With rates elevated and the impact of inflation, consumers are experiencing a cost of living crisis. When compounding the impact of elevated interest rates on the affordability of homes, we have seen a rapid slowdown in the housing market. It appears consumers are awaiting a decline in rates, which many are expecting in 2024, reducing the demand for mobility services.
This is likely to be an issue in the first half of 2024, although it is important to note we do not see UHAL losing any competitive advantage as a result of this. The company continues to invest in new assets to grow its revenue generation potential, positioning it well once rates fall.
Balance sheet & Cash Flows
Despite significant investment in its asset base, it is worth immediately recognizing that UHAL is reasonability financed, with limited solvency risk. The company has an ND/EBITDA ratio of 2.1x while its interest coverage is 8.5x.
Whilst much of this paper has made UHAL appear perfect, there is one clear drawback. The company’s FCF generation has been heavily negative, owing to capex commitments currently exceeding 50% of revenue (offset somewhat by asset sales). This primarily relates to investment in revenue-generating assets, which we expect to be accretive over time as they transition toward a mature level once online.
This requires investors to be patient with UHAL, with no distributions currently and a declining ROE. We believe its strong margins and growth trajectory should ensure that once Capex begins to step down, returns will accelerate.
Industry analysis
Presented above is a comparison of UHAL's growth and profitability to the average of its industry, as defined by Seeking Alpha (20 companies).
UHAL performs well relative to its peers, with superior growth and profitability. Importantly, even when factoring in its high D&A costs, the company boasts a superior NIM. This is a reflection of its strong competitive position in the market, alongside its investment in future growth.
Valuation
UHAL is currently trading at 9x LTM EBITDA and 1.9x book value. This is a premium to its historical average on an EBITDA basis.
A small premium to its historical average appears reasonable in our view, owing to the increased asset base, development of a number of revenue streams, and the potential for expansion as market conditions improve.
This said, the company is trading at a discount to its peer group and its historical average book value. We believe both discounts are illustrative of the cash flow risk. The company has, and continues to, invest heavily in future earning-generating assets, which creates execution risk. If the unit economics of these assets change, its potential returns are materially impacted.
Broadly, we believe the company is likely slightly undervalued, as its financial superiority outside of FCF, and the relative “safety” of hard asset investment (real estate and vehicles), mean a deep discount is unwarranted.
Key risks with our thesis
The key risk and catalyst factors revolve wholly around economic development. The timing of interest rate movements, whether the US enters a recession, and even election results will have a material effect on the US economy and thus UHAL’s financial performance. We see limited share price development until the housing market improves.
Final thoughts
UHAL is a high-quality business in our view, and an interesting example of going “all in” on future profitability. The company appears well managed, with expansion at a reasonable pace and intelligent strategic decision-making to develop the company’s wider revenue profile.
This said, we believe investors will benefit from patience, given the importance of the housing market’s health on the growth potential of the company. With rate hikes incredibly unlikely in Q1-Q2 2024, we see limited share price movement.
For further details see:
U-Haul: Long Term Compounder Awaiting A Decline In Rates