UHAL: Positive trends continue. Increasing estimates. Comments on the virtual analyst day.

By Ian Gilson, PhD, CFA

The positive trends of the first quarter for AMERCO (UHAL) have continued through the second quarter. Consequently we have increased our estimates for revenue and earnings. Revenue estimates for 2014 and 2015 fiscal years are now $2,739 million and $2,949 million as compared to $2,692 million and $2,840 million. Our earnings per share estimates are now $16.98, up from $16.27 and $19.44. EBITDAL valuations, shown on page 8, are within the values of the past two years based on our target price of $190 a share.

U-Haul truck and storage rental revenue are being driven by increasing capital expenditures that are not being matched by the competition. More trucks available contribute to more transactions and the company's past investments in IT infrastructure have reduced the expenses needed to handle the transactions.

On August 29, 2013 the company held a virtual Analyst and Investor meeting. During the Q&A session several questions were asked that had been asked on several quarterly conference calls. We have decided to give our take on answers, that are not necessarily the same as managements responses.

First, management and the company's ESOP own 70% of the outstanding shares. Institutions own 29.1%. This is no longer a stock for individuals.

Change the name to U-Haul: Money managers know what AMERCO does so changing the name is unlikely to have a significant impact on the stock price.

Stock split: There are many stocks selling between $150 and $200 a share so AMERCO is not alone in this regard. There are a number of stocks selling for over $400 a share. Institutions buy stocks as a percentage of a portfolio, as a block. This is no longer a retail market. Having said that, an increase in shares would be an increase in liquidity, and this would reduce volatility. This would be a positive. However, reduced volatility means lower highs and higher lows.

There have been many companies that, in the past, implemented a stock split when the stock reached a certain price. This did not seem to have a significant improvement in the valuations of these companies as compared to their peers so, in our opinion, a stock split may not have a significant long term impact on the adjusted stock price.

Formation of a REIT: Although the operations of a company storage site are complex (all storage location double as a truck rental site) and it may be impossible to allocate earnings to each operation it is possible to set up a REIT. If the Real Estate Division were to own all the real estate and it was leased to the storage and truck rental divisions the REIT would have income and the assets of the REIT would be the real estate.

But, look at it from the perspective of the current majority shareholders. To qualify as a REIT certain ownership criteria must be met. Some of the current shareholders would have to sell their stock, thus incurring significant tax liabilities. The income of AMERCO would go down and this could have an impact on the price of UHAL, and the wealth of the current stockholders.

An annual dividend: In fiscal 2016 and 2017 nearly $600 million of mortgage debt matures. Although we are sure that there would be no problems in negotiating new loan agreements it is better to have extra cash as a standby resource.

A copy of the full research report can be downloaded here >>  AMERCO Report

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