U-Haul: A Closer Look At The Storage Industry Giant

seekingalpha04-18

U-Haul Holding Company has made significant capital expenditures and acquired a new location, which could drive net sales growth.The company is a leader in the domestic storage market, offering rental...

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Yuji Sakai U-Haul Holding Company (NYSE:UHAL) recently made significant capital expenditures, reported the acquisition of a new location, and there is more focus on new pricing strategies. All these revenue drivers, U-Haul’s online marketplace, and new web-based technology could bring net sales growth in the coming years. There are obvious risks from the existence of third-party agents and new supply chain issues, however I believe that UHAL does seem to have certain upside potential in the stock valuation. U-Haul Holdings We are talking here about one of the largest companies in the United States domestic market in terms of products and solutions for the storage of goods, whether for residential or commercial use. The company maintains the slogan of “Do it yourself”, and its service is based mainly on the rental of products for the transfer and storage of goods, among which its classic orange trucks with the brand's inscription stand out. In 2023, the company's fleet included 192,200 trucks, 135,000 trailers, and 44,500 other towing devices, offered to the public through its own network of retail stores as well as independent distributors authorized by the company. In addition to these offers that belong to the traditional core of the company's business, we also find among its services more than 1,900 storage locations in the United States and Canada as well as vehicle transportation services, always maintaining the logic of renting to independent consumers or businesses. Moreover, to a lesser extent, the company sells packaging and storage solutions for various products such as computers, technological devices, household vessels, and various objects among others. Another related business in which the company maintains activities is propane refilling, with 1,200 locations throughout the country. At the end of 2023, the company had 11 production facilities managed by its subsidiaries and 2,200 retail stores, of which approximately 450 are managed by independent distributors. The company's activity is distributed into three business segments, of which one corresponds to the rental activities of mobility and storage instruments, representing approximately 94% of the annual revenue as compared to the other two segments, which are those of life insurance and property insurance.   Source: 10-Q Property insurance segment is aimed at covering, through the company's capabilities, the claims of its clients regarding the loss or breakage of any of their objects during transfers as well as various claims in this regard. It represents around 3% of annual income of the company. Occupying only 1% of the company's income is the life insurance segment, which is responsible for writing life insurance for the senior citizen segment in the United States domestic market. The bulk of the company's activities is carried out via the mobility and storage segment, which covers the services described above in relation to the storage of goods as well as their transportation through the rental of trailer trucks or devices for towing goods. With the historical line of this business already consolidated and a large fleet of trucks that maintains activities in the United States and Canada, the company has dedicated itself in recent years to developing technological capabilities in relation to its services. At this point, there is the application for direct use by consumers and the management of truck rentals digitally as well as the innovative alarm system for the protection of household goods, a market in which the company has detected great opportunities of growth. I believe that it is a great moment to discuss the company’s business model, mainly because of beneficial expectations for the year 2024 and 2025. 2024 EPS estimate is expected to be close to $3.3, and 2025 EPS could be close to $4.58. In my view, EPS growth could bring stock price enhancements in the coming quarters.   Source: Seeking Alpha Balance Sheet As of December 31, 2023, the company reported a significant amount of cash, close to $1.8 billion. With this level of liquidity, I believe that management will most likely be able to build further property and equipment in the coming years. The largest part of the balance sheet is represented by properties including buildings, land, and rental trucks. They represent close to $17 billion. With this level of properties, I believe that U-Haul Holding could receive a significant amount of debt if necessary. The asset/liability ratio is larger than 1x, so I would say that the balance sheet remains solid.   Source: 10-Q The total amount of debt includes notes worth $6 billion and total liabilities of $11 billion. Given the level of property and equipment, I do not believe that the total amount of debt looks scary.   Source: 10-Q I studied carefully the interest rate paid to understand the cost of debt and cost of capital. Fixed rate includes interest close to 2.8% and 4.7%. With this in mind, I think that assuming cost of debt close to 4% and WACC of about 7% would make sense. The WACC used in my financial models is not far from these figures.   Source: 10-k Assumption 1: Brand Expansion, Recognition, And Growth Of The Network Of Independent Distributors Could Lead To Net Income Growth The company's strategic objective is to maintain its leadership positioning within the United States with regard to the storage and transportation of goods markets, mainly through the growth of the brand's presence as well as its recognition by expanding both the fleet and the trucks available, such as packaging products among others. For this, the expansion of the fleet is essential. Another point of expansion in this sense is the growth of its network of independent distributors, which by the end of 2023 would reach close to 22,000 active agents. Given the total amount of cash in hand, I believe that U-Haul is in a good position to retain more agents and increase the fleet. As a result, I believe that we could expect net income growth and EPS growth expectations increase. Assumption 2: E-commerce Efforts, And Web-based Technology Platform Could Bring Significant FCF Growth The company has developed its own e-commerce website as well as applications that offer loyalty programs and benefits for regular customers along with home security alarms, directing its business towards the expansion of new digital opportunities. In this regard, I would also expect business growth from the company's online marketplace, self-storage affiliates, and new web-based technology platforms. I believe that these initiatives could bring FCF margin increases and FCF growth in the coming years. Uhaul.com is an online marketplace that connects consumers to our operations as well as independent Moving Help service providers and thousands of independent Self-Storage Affiliates. Our network of customer-rated affiliates and service providers furnish pack and load help, cleaning help, self-storage and similar services throughout the United States and Canada. Our goal is to further utilize our web-based technology platform to increase service to consumers and businesses in the moving and storage market. Source: 10-Q Assumption 3: Reduction In Capital Expenditures From 2025 To 2034 Could Bring FCF Growth I believe that the recent decrease in FCF came as a result of increases in capital expenditures, which increased to impressive levels right after 2020. From 2024 to 2034, I assumed that the expansion will most likely be lower, which may bring increases in FCF growth. In my view, given the level of capex executed from 2020, at some point, capex may decrease back to the levels seen in the past. To meet the needs of our customers, U-Haul maintains a large fleet of rental equipment. Capital expenditures have primarily consisted of new rental equipment acquisitions and the buyouts of existing fleet from leases. Source: 10-Q Assumption 4: Eventual Increase In Transaction Volume And Improving Pricing Could Bring Net Sales Growth In the last quarterly report, U-Haul Holding noted that it is currently focusing on improving pricing strategies and utilization for self-moving equipment rentals. Under my base case scenario, these strategies and the most recent expansion of existing locations could bring acceleration in both net income and FCF growth.  We will continue to focus our attention on increasing transaction volume and improving pricing, product and utilization for self-moving equipment rentals. Source: 10-Q With respect to our storage business, we have added new locations and expanded existing locations. In fiscal 2024, we are actively looking to complete current projects. Source: 10-Q  My Best Case Expectations, And DCF Model With Correct Assumptions Under this scenario, I assumed 2034 net income of $1763 million and 2034 net income growth of about 8.62%. In addition, I assumed a median net income growth of about 7.98%, which I believe is in line with the expectations of the market and previous net income growth reported by other peers.   Source: Seeking Alpha Taking into account 2034 depreciation of $1.292 billion and amortization of deferred policy acquisition costs worth $60 million, I believe that the amortization of premiums could be at least $40 million. In my view, we must discard the net gains on disposal of personal property, including the net gains on disposal of real, together with the net gains on sales of investments, and finally the net losses on equity investments since they do not seem recurrent items. Now, with amortization of debt issuance costs of around $9 million, I also included a change in allowance for inventory reserves of $44 million, deferred income taxes of about $230 million, and changes in inventories and parts worth -$180 million. In addition, I assumed 2034 prepaid expenses of not less than -$9 million, changes in related party assets worth -$27 million, and changes in accounts payable and accrued expenses close to $1 million. Finally, with other policyholders' funds and liabilities of about -$9 million, I obtained a CFO of about $3.2 billion and 2034 FCF of close to $1.775 billion.   Source: My DCF Model With the previous results and a WACC of 6%, I obtained 2034 NPV of future FCF close to $6.470 billion. In addition, with EV/FCF of 13x, NPV of future terminal value would be close to $12.160 billion. Note that the sector trades at close to 12.9x TTM EBITDA, so I believe that my trading multiple appears conservative.   Source: Seeking Alpha In addition, total EV would stand at $18.630 billion, which minus net debt of $4631 million leaves us with an equity valuation of $13.9 billion. Finally, I obtained a fair share price of $71.40.   Source: My DCF Model My Worst Case Scenario With Unsuccessful Previous Assumptions Under this case scenario, I assumed that previous forecasts are not correct. Hence, 2034 net income could reach $1.597 billion, which would result in 2034 net income growth of 7.12% compared to the previous year. When comparing it with previous years, we observe that the median net income growth would stay at 6.61%, a bit lower than that in the previous case scenario. I assumed 2034 depreciation of approximately $1.217 billion, and amortization of deferred policy acquisition costs could be around $52 million. I think that the amortization of premiums should be at least $34 million, while the amortization of debt issuance costs is projected to be around $8 million. Net gains on disposal of personal property, net gains on disposal of real estate, net gains on sales of investments, and net gains on sales of investments should not be taken into account in this analysis. I believe that they do not represent recurrent events. In addition, I anticipated 2034 deferred income taxes of around $192 million and reinsurance recoverables and trade receivables worth $0.804 million. I also assumed that the inventories and parts could be close to -$146 million, with prepaid expenses of close to -$8 million. I don't expect the capitalization of deferred policy acquisition costs to be relevant, and I project that the other assets could be approximately $81 million. I also estimate that accounts payable and accrued accounts could be close to $3 million. Additionally, I included other policyholders' funds and liabilities worth -$7 million, along with deferred income close to $0.580 million.   Source: My DCF Model Based on these projections, I obtained 2034 CFO of approximately $3.062 billion, from which I substract capex of -$1.704 billion. This would give us an approximate 2034 FCF of $1.357 billion. With a WACC of 7%, my results included 2034 NPV of future FCFs of about $8.1 billion. With this information, I also calculated that the terminal value would be $1.696 billion. Considering an EV/FCF of 12x, we obtain a NPV of $8.484 billion. Adding these values, we get a total EV of $16.590 billion. By subtracting the net debt, I obtained an equity valuation of $11.959 billion. Consequently, I obtained a fair price of $61 per share.   Source: My DCF Model Competitors Based on the fact that this company maintains leadership positions in the residential storage market in the United States, we can consider that it is not affected by the participation of minority players with regional reach in different parts of the country. This does not rule out the presence of large companies with similar offers, among which we find Avis Budget Group, Inc. (CAR) and Penske Truck Leasing for the instrument rental market along with $Public Storage(PSA-N)$ Inc. (PSA), CubeSmart (CUBE), Extra Space Storage, Inc. (EXR), and Life Storage, Inc. in the competition for residential storage products. Risks In general terms, some of the risks that affect the company are the great dependence on third-party agents to collect its income, the possible reduction in the fleet renewal program due to economic crises, complications in supply chains, and the concentration of suppliers. Furthermore, any increase in the enactment of laws or regulatory frameworks in relation to the mandatory use of electric vehicles or the decrease in polluting emissions in this sense could affect the truck rental activity. Conclusion  I believe that U-Haul’s online marketplace, web-based technology, and recent acquisition of new locations will most likely drive FCF growth up in the coming years. Besides, further increase in the network of independent distributors and brand expansion could bring net sales growth and net income generation. I do see risks coming from relationships with third-party agents to collect income or supply chain issues. With that, I do believe that the U-Haul Holding could be trading a bit more expensively.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2428516922"}