Zacks Small Cap Research – UHAL: Reports 3Q FY2024 Results: Total revenues declined 2.6%, in line with expectations. Self-Storage continues to deliver double-digit growth and U-Box’s top-line increased by roughly 4.8%. Investments in the truck rental fleet, UBox and the self-storage business continue. – Technologist

By Steven Ralston, CFA

NYSE:UHAL

READ THE FULL UHAL RESEARCH REPORT

U-Haul Holding Company (NYSE:UHAL) reported financial results for 3Q FY2024 on February 7th. During the first nine months of fiscal 2024, the company has experienced modest single-digit declines in U-Move-related revenues. Despite this impact on demand, the company’s 4-year top-line CAGR (using the first nine months of fiscal 2024 versus the first nine months of fiscal 2020, which smooths the effect of the pandemic) is 9.44%. Also, despite the 2.6% decline in total revenues in the third fiscal quarter, the company achieved the 3rd highest level of total revenues of any third quarter in the company’s history.

Management continues to invest in the truck rental fleet, U-Box products and self-storage business. The company’s net capex budget on new rental equipment has been increased twice during FY2024 from $820 million initially to now $930 million for the full fiscal 2024. During the first nine months of fiscal 2024, $1,350 million gross has been spent on new rental trucks. Also, the company continues to invest in digital tools in order to facilitate customer engagement as well as to better understand customer behavior and current market trends. Management’s steady commitment to long-term investments has permitted U-Haul to benefit from step-up increases in demand, most recently during the pandemic.

U-Haul has a strong liquidity position. The Moving and Storage operating segment has approximately $2.21 billion of cash and available credit, which enables management to purchase of self-moving equipment, even if the credit markets make debt financing problematical. Furthermore, management continues to develop self-storage facilities. A typical self-storage project requires approximately three years to develop from acquisition to opening, and the long term prospects for the industry remain positive.

Financial Results for Third Quarter of Fiscal 2024

On February 7, 2024 after the market close, U-Haul Holding Company reported financial results for the third fiscal quarter ending December 31, 2023. Total revenues decreased 2.6% YOY to approximately $1.34 billion. Self-moving equipment rentals decreased by 6.6% (or $59.0 million) as the softness experienced in the first and second fiscal quarters continued into third fiscal quarter as the metrics of the number of transactions, revenue and average miles driven per transaction decreased with declines in the one-way business being more apparent. Other revenues (which are predominately driven by U-Box) increased 4.8% (or $4.6 million). Self-storage revenues increased 10.5% (or $20.0 million).

Management has made progress toward returning to a normalized rotation program. Though the company has not purchased as many new vehicles as desired due to both the lack of availability of certain truck models and the artificial price increases imposed from the truck manufacturers’ emphasis on EVs, $1,350 million gross spent on new rental trucks during the first nine months of fiscal 2024. During the quarter, the net capex budget for the full fiscal year (gross purchases net of proceeds) was increased from $870 to $930 million.

In self-moving/self-storage products & services, revenue decreased 6.0% (or $4.5 million), which was due to lower sales of hitches, moving supplies and propane.

In the self-storage area, revenues increased 10.5% (or $20.03 million) as the average monthly number of occupied units at company-owned locations increased by 5.7% (or 38,046 units) and on a 3.8% improvement in average revenue per occupied foot. However, occupancy rates decreased 110 basis points YOY from 82.9% to 81.8% because new capacity over the last 12 months expanded by 42,000 new storage units (4.4 million net rentable square feet).

Total operating costs and expenses increased by 8.2% (or $87.0 million). Operating expenses increased 5.0% (or $36.9 million), primarily driven by non-recurring costs (approximately $17 million), including from a large vendor rebate program, along with increases in personnel (approximately $13 million), property taxes (approximately $4 million) and building maintenance costs. However, repair expenses associated with the rental fleet decreased by $2.9 million during the quarter.

Earnings from operations decreased 38.3% (or by $122.8 million) to $197.6 million compared to $320.4 million in third fiscal quarter of 2023. An income tax expense of $30.5 million was recorded. The operating margin contracted 855 basis points YOY to 14.8%.

Depreciation expense increased 52.5% (or $59.8 million) as rental fleet depreciation increased $12.6 million (due to an increased pace of new additions to the fleet).

Interest expense increased 14.2% to $67.4 million, while at the same time, net investment and interest income increased by 9.9% to $57.5 million.

For the third quarter of fiscal 2024, U-Haul Holding Company reported a net income of $99.2 million (or $0.47 per diluted voting share), a 52.4% decrease compared to $199.2 million (or $0.98 per diluted voting share) in the comparable quarter last year. Shares outstanding remained stable at 19,607,788 shares.

Note: Management utilizes the two-class method where distributed earnings (dividends) and undistributed earnings are allocated in a three-step process to each class of common stock.

As of December 31, 2023, U-Haul Holding Company has a strong liquidity position. The Moving and Storage operating segment has approximately $2.21 billion of cash and available credit. Working capital sequentially decreased by 6.6% to approximately $5.48 billion.

Valuation

U-HAUL operates in both the “do-it-yourself” consumer truck and trailer rental business and in the self-storage industry. The vehicle rental business requires considerable investment in infrastructure (rental facilities and vehicles). Earnings in this segment tend to exhibit cyclicality, which is a consequence of the substantial earnings leverage that can be derived from improved utilization of the fleet. On the other hand, despite also requiring a significant investment in infrastructure (storage buildings), self-storage operations tend to be much less cyclical and provide steady cash flow.

From an investment perspective, both types of operations are generally valued on the metric of EV-to-EBITDA (Enterprise Value-to-Earnings Before Interest, Taxes, Depreciation and Amortization). From the Industry Comparable table below, it is easily observable that self-storage operations are valued at a much higher EV-to-EBITDA basis (18.8 on average compared to only 5.0 for truck rental companies) due to each industry’s fundamental attributes described above. Due to the small sample size of public truck rental companies (since Penske and Enterprise are not publicly traded), the EV-to-EBITDA metric is distorted.

By expecting the high EV-to-EBITDA valuation metric to be 9.68 at some point during the next 12 months, a target price of $70.25 is indicated.

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