Benzinga | Nov 8, 2021 10:12AM EST

UHAL: AMERCO Reports 5th Consecutive Quarter of Financial Results that is Above Expectations; operating margin expands to 34.8% exemplifying leverage in an economic environment of strong demand

By Steven Ralston, CFA

NASDAQ:UHAL

READ THE FULL UHAL RESEARCH REPORT

Demand for self-moving equipment and self-storage continues to be strong, which has led to strong pricing in both average rental rates and average revenue per occupied storage space. Under the AMERCO's (NASDAQ:UHAL) growth strategy, management had optimally positioned the Moving and Storage operating segment to benefit from the surge in demand generated by the pandemic through consistent investments in capacity expansion that had increased the number of retail locations, box trucks and trailers in the rental fleet. Prior to the pandemic, during fiscal 2019 and fiscal 2020, company-owned locations increased 15.4%, the truck fleet expanded 9.3% and the trailer fleet increased 7.6%. As a result, the company's operating margin expanded to a historically high level of 34.8% in the second fiscal quarter.

Management expects an uneven pace of capital expenditures as replacement trucks become available from GM and Ford. There are expectations that when the company is able to normalize the fleet rotation program, the capex will lead to increased depreciation charges, which will dampen earnings growth.

Along with attempting to acquire replacement trucks, the company is implementing a U-Box expansion program this winter. The effort includes increasing the number of U-Box warehouses (along with the size of those warehouses), and increasing the size of both the U-Box container fleet and the U-Box delivery truck fleet.

Also, management is increasing the pace of investment in the self-storage area. The company's property acquisition pipeline continues to be robust. In October, 16 development properties closed, and currently, approximately $310 million in deals (roughly 125 properties) are in escrow. AMERCO constantly issues press releases on the acquisition of properties and the opening of new facilities on prnewswire.com using the keyword U-Haul.

From a valuation perspective, self-storage operations command a higher valuation multiple than truck rental companies. The image below from the company's most recent August Analyst Day conveys the size and scope of the self-storage development program relative to the company's historical record.

Financial Results for Second Quarter of Fiscal 2022

On November 3, 2021 after the market close, AMERCO reported financial results for the second fiscal quarter ending September 30, 2021. Revenues and EPS were well above our expectations. Total revenues increased 25.6% YOY to approximately $1.66 billion, driven by a 26.6% increase (or an increase of $248 million) in self-moving equipment rentals. Other revenues (which is predominately driven by U-Box) increased 55.2% (or $50.7 million) while self-storage revenues increased 33.1% (or $38.2 million).

In the self-moving equipment rental business, revenues increased across all four major metrics: volume of transactions and the average revenue per transaction for both in-town and one-way rentals of trucks and trailers. The improved metrics were helped by the increases in the number of retail locations, independent dealers, box trucks, trailers and towing devices over the last 12 months.

In self-moving/self-storage products & services, the 6.5% revenue decrease was due to a tough comparison versus the second quarter of fiscal 2021 when an increase in the sales of hitches during the pandemic drove a 34.9% increase.

In the self-storage area, revenues increased 33.1% (or $38.2 million) as the average monthly number of occupied units at company-owned locations increased by 103,000 units, occupancy rates increased YOY from 71.9% to 84.3% and new capacity over the last 12 months expanded by 3.9 million net rentable square feet, along with an improvement in average revenue per occupied feet.

Other revenue increased 55.2% (or $50.7 million) driven primarily by growth in the U-Box program.

Total costs and expenses increased only 16.3% (or $152.4 million). Operating expenses and commission expenses increased 21.2% and 28.7%, respectively. Depreciation expense decreased by $1.69 million (or 1.2%) as an $8.0 million gain on the sales of rental trucks more than offset the $3.9 million increase in depreciation on the rental equipment fleet.

Management had planned to return to a normalized rotation program during fiscal 2022; however, truck manufacturers (General Motors and Ford) have been unable to supply a sufficient amount of replacement trucks. In the first six months of fiscal 2022, capital expenditures on new rental trucks and trailers totaled $548 million.

Earnings from operations increased 47.7% (or by $152.4 million) to $578.7 million compared to $391.8 million in second fiscal quarter of 2021. An income tax expense of $129.0 million was recorded.

For the second quarter of fiscal 2022, AMERCO reported a net income of $409.9 million (or $20.90 per diluted share), a 53.9% increase compared to $266.4 million (or $13.58 per diluted share) in the comparable quarter last year. Shares outstanding have remained stable at 19,607,788 shares for a decade.

As of September 30, 2021, AMERCO has a strong liquidity position. The Moving and Storage operating segment has approximately $2.486 billion available including from cash, cash equivalents and a $600 million senior unsecured note private placement offering with 8, 9, 10 and 12 year maturities and a weighted average interest rate of 2.59%. Working capital sequentially increased 15.4% to approximately $6.72 billion.

In summary, AMERCO reported strong quarterly results with both the top-line (total revenues) and bottom line (net income/EPS) coming in well above expectations. The operating margin expanded 122 basis points sequentially from 33.6% to 34.8%, exemplifying leverage in environment of strong demand and pricing.

Financing

On October 4, 2021, AMERCO announced that the company has entered into an agreement to issue $600 million of fixed rate senior unsecured notes in a private placement consisting of four $150 million tranches, namely,

Series A 2.43% Senior Notes are due September 30, 2029

Series B 2.51% Senior Notes are due September 30, 2030

Series C 2.63% Senior Notes are due September 30, 2031

Series D 2.78% Senior Notes are due September 30, 2033

The weighted average interest rate of the four tranches is 2.59%.

The proceeds are being targeted to fund the expansion of retail locations in the self-storage and self-moving areas. Management does not plan on registering the notes under the Securities Act of 1933.

Special Dividend Declared

On October 6, 2021, AMERCO declared a special cash dividend of $0.50 per common share. The dividend was paid on October 29, 2021 to holders of record on October 18, 2021.

Valuation

The expected EV-to-EBITDA range for this valuation metric over the next 12 months is 8.4-to-10.4. The target price for AMERCO is $875 per share, which is based the stock achieving second quartile valuation level within the expected range.

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