You may have never heard of Amerco (NASDAQ:UHAL), but odds are probably 99:1 that you're familiar with the company's largest subsidiary, U-Haul. Emblazoned with its eye-catching orange-and-white logo, U-Haul's trucks and trailers are so ubiquitous on the roads in North America that the company's name has become synonymous with do-it-yourself moving.
Given this brand strength, it might not be surprising that Amerco's stock has been a winning performer in the industry..
Outperforming competitors and the market by miles
The stock's one-year and 10-year charts tell a similar story: Amerco's total return is miles ahead of the market and its closest competitors in its core do-it-yourself moving business -- Avis Budget Group and Penske Automotive Group -- and its self-storage business, Public Storage.
A road trip through Amerco's business
U-Haul is Amerco's primary business operation, accounting for about 91% of its total revenue in fiscal year 2015, ended in March. Amerco also has property and casualty and life insurance businesses, which, combined, contributed the remaining approximately 9% of revenue. Amerco Real Estate Company owns real estate leased to the operating entities.
Founded in 1945, U-Haul is the 800-pound gorilla in the DIY moving business -- and, in fact, essentially invented the industry. It has about 19,800 total retail locations (approximately 1,600 company-owned and 18,200 franchise locations) in the United States and Canada. This is reportedly more than five times the number of locations owned by its two largest competitors combined. The size of the company's fleet of trucks and trailers also significantly dwarfs that of its competitors. Management continues to expand its retail footprint and fleet, which helped it grow revenue in this segment by 9.8% in fiscal 2015.
U-Haul is also a major player in the self-storage business, which it entered in the 1990s as a natural offshoot of its moving business. Self-storage only contributed about 7% of Amerco's total revenue in fiscal 2015. However, it's been rapidly growing -- revenue jumped 16.1% in fiscal 2015 -- and should continue to expand nicely due to the leverage provided by U-Haul's massive moving business. Despite increasing the number of owned storage units to 232 from 207 last year, occupancy rates climbed from 80.5% to 81.7%. This strong demand not only bodes well for future growth but has also enabled the company to raise rates.
A jaunt through Amerco's management and insider ownership
Joe Shoen, son of the founder, has led Amerco since 1986, considerably growing the business and expanding into self-storage. Shoen owns a nearly 18% stake in the company, so management's interests should be largely aligned with shareholders'. Altogether, the Shoen family owns 53.6% of total shares.
The Shoens' controlling stake in the business is likely one main reason that Amerco's stock flies under the radar of most investors. Wall Street often doesn't pay much attention to such stocks, especially when top management doesn't court it. This can be a positive for investors, as there's often more room for positive earnings surprises. In fact, Amerco beat the sole Wall Street earnings estimate by 20% in two of the most recent four quarters.
U-Haul's powerful competitive advantage: A network effect
The best long-term investments are usually in companies that have sustainable competitive advantages, or "moats." Without a strong moat, new competitors can easily enter a market and steal market share.
Several competitive advantages come to mind for U-Haul. These include the company's fun advertising and marketing strategies, as well as its community involvement, which garners it a dose of goodwill. However, U-Haul's most powerful competitive advantage stems from a network effect. Network effects, which are often the result of a first-mover advantage, result when each additional "node" added to a network enhances the value of all the existing nodes. In U-Haul's case, the "nodes" are retail locations equipped with an appropriate fleet. If U-Haul opens a location in Anytown, USA, its other locations become more valuable because anyone who's moving to or from Anytown, USA, will also be using another U-Haul location.
U-Haul's network effect is a virtuous circle: As more locations are opened, more people use the company's services, which in turn enables it to open yet more locations with the additional money generated. Network effects often allow companies to raise rates and, thus, increase profitability. In the DIY moving business, convenience of locations on both the pickup and drop-off ends is paramount, as is availability of the desired type of vehicle when needed. Price tends to be secondary.
Keying in on some numbers and future growth prospects
Amerco's operating and profit margins have been expanding, so its earnings have been growing faster than revenue:
The company's revenue growth and margin expansion -- operating margin is a solid 23.4% for the trailing 12 months -- has surely been fueled by the convergence of some positive factors over the past several years. These include the housing market rebound following the 2008 financial crisis, plummeting fuel costs, and low interest rates. Granted, these tailwinds won't last forever. However, thanks to the network effect, the moving business should be able to post steady growth by taking market share from others and by increasing the total size of the market.
Moreover, the self-storage business has tons of room -- no pun intended -- for growth. This is a high-margin business, so the fact that it's expanding considerably faster than the moving business means that it should continue to help increase the company's overall margins. (U-Haul doesn't break down its margin between the moving and storage businesses, but Public Storage's 52% operating margin points to the fat margins in self-storage.) Furthermore, this business involves a low outlay of capital after units are built, so it's a nice cash cow with a recurring income stream. Growth in this business should, therefore, continue to help fund the more capital-intensive moving business, help management to continue to pay down debt (debt-to-equity has come down, but is still a fairly high 108%) and help fund special dividends. Amerco doesn't pay a regular dividend but occasionally shares the wealth with shareholders by declaring special dividends. On Oct. 2, it paid a dividend of $3 per share.
The finish line
Amerco presents the opportunity for investors to own a nicely balanced company that combines the leader in the DIY moving business with the more nascent higher-margin, faster-growing self-storage business. The stock is reasonably priced at a forward P/E of 15.2 and a five-year PEG of 1.1.
Lastly, while it seems highly unlikely that Amerco would ever spin off its self-storage business into a real estate investment trust (REIT), it's nice to know that this option exists.