Is America Ready to Move Again?
A Look into The Most Famous Orange Truck Company
—15 minute read—
Everybody’s heard of U-Haul🚚, but few realize that it’s part of a holding company called AMERCO which is publicly traded (ticker:UHAL). The company is an American tradition that’s been around since 1945.
AMERCO is composed of three, somewhat unrelated segments: 1) Moving & Storage 2) Life Insurance 3) Property & Casualty Insurance. For the sake of time, I’m going to focus only on the first, which is what they are known for and accounts for 90%+ of revenues1.
An investment in U-Haul relies on three long-term premises that should carry the bulk of the value going forward:
U-Haul will remain the indisputable leader in the Do-It-Yourself moving market and increase market share and volume over time.
U-Haul will continue to successfully expand its self-storage presence, which is complementary to their moving business and an attractive use of capital.
Management will remain shareholder friendly with clear capital allocation priorities and a focus on the very long term.
I will also discuss a fourth driver that has some optionality value and may not be fully priced-in at the current valuation. Let’s move on.
The Moving Industry: Stressful and Expensive
There are two basic universal truths about moving:
1) It’s one of the most stressful experiences in life
2) If you want to remove some of that stress, it’s expensive
Roughly 40mm Americans move each year, with ¾ of them moving in the form of DIY (rent a truck or borrow your friend’s pickup truck) and ⅔ of all moves are local (moving within the same city). There are typically three options when you move. One, you can pay the price of comfort and hire someone else to do it, which can run into the thousands of dollars depending on the distance. Two, you can go the DIY route by renting out a truck and any supplies you need, usually costing significantly less than half of what you would pay for a moving company. Three, if you really don’t want to spend a dime and don’t have much stuff, you can beg your friend to lend you their pickup truck and ask for his help.
U-Haul Moving: Size Matters
U-Haul has a simple mission, which outlines its flywheel:
“Provide a better and better product and service to more and more people at a lower and lower cost”
This is a case of scale economies shared. The better the product U-Haul offers, the more customers it attracts which allows U-Haul to grow in size and share the economic benefits2 with more customers via lower costs, which results in a better product and even more customers. This is similar to the model followed by Costco and Amazon.
There’s little question that U-Haul is the leader of the DIY moving industry, and they got here by staying focused and true to their mission. The numbers speak for themselves: U-Haul has over 23,000 locations and 176,000 trucks commanding a 50% market share in the DIY moving industry. Compared to the next closest competitor, Budget Truck, U-Haul has 25x as many locations and almost 9x the amount of trucks, a difference that has been getting wider as competitors have been retrenching from this business given how difficult it is. For example, Budget has reduced the size of its fleet multiple times in the past few years through a series of restructuring programs. The other two well-known companies, Ryder and Penske, are now more focused on the commercial B2B business (Budget more recently as well).
There’s another unique aspect to this industry, related to size and the critical mass required to succeed: physical network effects.
Let’s take an example. If you want to move from Marfa, TX to Houston, you will find multiple U-Haul options in Marfa as well as one in Houston that is closest to your new home. If you wanted to use Budget instead, you’d have to go to Odessa (2 hours 40 mins away) or El Paso (3 hours away). Tough luck!
U-Haul provides customers with maximum convenience and best prices, regardless of where they live or want to move to. This applies at the national level, and it’s the main reason why U-Haul has consistently kept taking market share: it has built a network of dealers and trucks for the past 76 years, which gets stronger every year, and it’s practically impossible for someone else to replicate this. It has also built an online network platform of local movers that you can hire in conjunction with the truck reservation and offers transparent pricing and customer reviews. Because of their scale, U-Haul is also capable of offering the best prices to customers3, while still generating a decent profit. Anyone planning compete with them would have to spend an insane amount of capital and time, undercut U-Haul in price while losing money, all while trying to gain the logistical and technological know-how of this complex and capital-intensive business. This should keep competitors at bay and let U-Haul keep increasing volumes and taking market share (10 year revenues have grown at 7%). Importantly, there’s still a lot of runway growth left given they have kept taking share from DIY, and also from people that use moving companies or are borrowing a friend’s truck. The demand for U-Haul’s product has rarely seen any signs of slowing.
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The Self-Storage Opportunity
Self-storage is a natural complement to the moving segment, as the typical moving customer also has storage needs in many cases, so combining the two makes sense. The company recognized this, and for the past 10 years has been aggressively expanding into self-storage, which has grown at a 14% rate, mostly by building storage from the ground up or converting existing properties4. Today, U-Haul owns ~47mm sq. ft. of self-storage (and manages another 20mm), making it a Top 3 player nationally in the industry, competing with the likes of Public Storage and Extra Storage.
There’s a caveat to pursuing this strategy with respect to the income statement: the properties come online with most of the associated operating expenses while generating almost no revenues, which depresses margins in the near-term. Eventually, management will slow down investments in this business and the company will benefit from the associated increase in revenue at very high incremental margins, driving an acceleration in profitability and expanding overall margins of the company given the attractive cost structure of the storage business at maturity.
Management: Focused and Transparent
The company is owned by the Shoen Family, consisting of two brothers: Joe (the CEO) and Mark, both holding 42% of the shares. U-Haul’s management had a rocky history in the 1980s and 90s, but current management has been in place for the past 30 years and manages the company with a very long term view (too long for some) and focuses on the core business. The track record shows it, as they’ve consistently grown revenues over time and increased shareholder value along the way. They prefer to stay under the radar, have no sell-side coverage, don’t play the Wall St. game and have a corporate name that has nothing to do with their main business (a question that comes up in almost every earnings call, management politely refuses).
How do you judge the character of management? You look what they’ve said and their actions. Joe Shoen has publicly given out his personal cellphone number to encourage customers to call him if they encounter any problems with U-Haul. He keeps his head down, wants no media attention and focuses on the customer. He is always worried about the competition, thinking consistently about how to improve the product and being candid about the company’s challenges and opportunities. He spends the week traveling to different U-Haul locations and scouting potential self-storage acquisitions, sometimes visiting as many as 17 states in a week. The company’s biggest luxury is a small plane, in order to get to as many locations as possible (similar to Walmart in the early days), but he insists that two people share a motel room and room service is not allowed. My kind of guy.
Good Business or Great Business?
I estimate U-Haul’s normalized ROIC to be in the area of 10-12%, which is nothing sensational but pretty adequate and certainly above their cost of capital. This falls under the category of a good business, with some caveats. With prudent leverage (which U-Haul has and supports), a business earning a return like this likely increases intrinsic value at a satisfactory rate, especially if combined with good capital allocation. There’s also a nice tailwind from self-storage units maturing and investment slowing down, which will drive ROIC higher. More importantly, what makes me very comfortable with this business is my conviction in its ability to keep earning those returns on incremental capital, given the permanent nature of the business and how hard it is for a competitor displace them. This gives me decent long-term visibility, helps me sleep well at night and any surprises to returns are more likely to be to the upside.
An Option on the Mover Rate
This is probably the most important chart of this piece. U-Haul has been able to grow transactions and keep taking share from competitors despite a consistent decrease in the national mover rate. This means, that any reversal in this trend, a potential post-COVID impact, will be a total boon for U-Haul as it would increase truck utilization and pricing, driving higher revenues, margins and increasing ROIC. We saw hints of this already in the past 9 months (which excludes the full-lockdowns in the beginning of the pandemic): U-Haul revenues increased of 24%, operating margins more than doubled and operating income increased 180%5. At its current share price of $560, the stock is trading at ~14X my estimated earnings for this year.
I believe America will likely be going through a period of housing reshuffling post-COVID, with a prolonged increase (and normalization) in the mover rate as a result. U-Haul is one of the best levered plays to capitalize on this trend.
Disclosure: Not investment advice; the author owns shares of UHAL
The Life Insurance segment is a bit odd since it has nothing to do with the company’s core business, while P&C mostly writes business for U-Haul customers in both the moving and storage space.
These benefits include things such as paying lower prices per truck given how much volume they buy each year (over $1B ) and other scale and network benefits.
This is usually the case, but not always. What can sometimes distort this is the supply and demand dynamics in different cities and required fleet adjustments. For example, if there’s too many trucks going from San Francisco to LA, it may be very expensive to take that route while the opposite may be extremely cheap in order to re-accommodate the fleet.
Management has stated the existing self-storage acquisition market is expensive so they see better returns in ground-ups and conversions.
Incremental margins were 75% which means that for every additional $1 of revenue, $0.75 dropped to the operating income line.
As always, great work Sleepwell.
Did you build that chart back to 1971 on your own?!
Interesting take on a “boring” business on the surface.