Do-it-yourself mover U-Haul's parent company, Amerco (NASDAQ:UHAEQ), sits in Chapter 11 bankruptcy, having defaulted on a debt payment last October. Yet the stock has moved up almost 1,000% from its lowest point, and the company believes it can emerge from Chapter 11 without any dilution of its common shareholders.
This is one of those interesting (and exceedingly rare) situations where a company in bankruptcy might not be a death trap for investors.
Have no doubt, Amerco has a substantial amount of hair on it, and not flowing auburn locks or blond ringlets. It fired PricewaterhouseCoopers, its former auditor, when it determined that the auditors had offered horrible advice regarding Special Purpose Entities (SPEs) and that rectifying the mistake would eliminate 92% of its net income and pummel its balance sheet. PwC's mistake became Amerco's big problem, and it nearly tanked the company. Amerco has launched a $2.5 billion lawsuit against PwC, but the damage was already done. The SEC launched an investigation, and several years' worth of Amerco financial statements were rendered untrustworthy.
But Amerco is no Enron. Nor is it even a Kmart (NASDAQ:KMRT), which went through massive degradation of its core business, meaning that it had no shareholder's equity left to distribute after restructure.
U-Haul, Amerco's key subsidiary, is healthy. In Friday's quarterly conference call (transcript provided by CCBN), Amerco Chairman Joe Shoen noted that the company has more assets than liabilities. Moreover, the process of bankruptcy offers an interesting view into what is actually a healthy corporation. Stated book value of corporate assets are based upon accounting laws, and can distort actual value. Shoen noted, "real estate appraisals showed the market value of Amerco's unencumbered owned real estate is $550 million higher than stated book value." In other words, the company had some substantial value not captured under accounting standards.
There are other problems within the company. Two years ago, Amerco suddenly fired the managers at insurance subsidiary Republic Western when they discovered the company had been writing policies when it had insufficient knowledge to assess potential liabilities. These lines of insurance are now in runoff, which means that Republic Western is not renewing policies, but is still on the hook for ones in force. Rarely are surprises in the insurance industry good things, so this is a scary factor that could influence a recovery.
But U-Haul and Amerco's other lines of business are substantially healthy, so much so that most of them are not even included in the bankruptcy filing of the parent.
This strange case is a good object lesson of what can go wrong when a company does things that it doesn't understand. In this case, it relied on accountants to come up with a convention to improve its balance sheet, and that put the company in bankruptcy. It also has exposure to insurance policies that may continue to bite it in the rear.
Fundamentally, this is a good company that more than likely would be many times better off if it had simply taken a more conservative approach.
