U-Haul: An Underfollowed Compounder

U-Haul (UHAL) is one of those rare class-defining brands, like a Google, Kleenex, Band-aid, etc., where even the competition is often referred to as “renting a U-Haul.”

This brand recognition stems from the fact that UHAL basically built the do-it-yourself (DIY) moving market from scratch back in 1945 and subsequently over decades of aggressively signing up land-owning franchisees, built the nation’s dominant DIY moving company with roughly 50% share of the DIY market (which is then something like 50-70% of the total moving market, the rest being professional movers) and more than 8x as many locations and 12x as many trucks as its nearest competitor; Avis Budget (who has been retreating from the space for some time now).

At a high level – UHAL’s business can be thought about in two segments: Moving Equipment and Self-Storage.

U-Haul Moving Equipment (82% Revenue, high single-digit long-term growth)

UHAL’s customers can rent a truck or trailer either in person at one of their many locations or online/through their mobile app with the added convenience of contactless checkout. Customers are charged a price depending on the number of days the equipment will be rented, how many miles it will be driven, location, size of the equipment, and whether it is a one-way rental or an in-town rental.

While the customer is going through this reservation process, UHAL also cross-sells additional products like self-storage and insurance (which are included in their other segments) but also an array of products that make sense to consolidate into this segment – moving materials (furniture boxes, dollies, packaging materials), actual moving labor (through their movinghelp.com online marketplace, another network effect of largest supply, demand, and reviews) and most recently, their U-Box service where UHAL will deliver a box to a customer’s front yard, the box gets filled with stuff and then UHAL will pick it up and transport it to an end destination or a self-storage location.

In addition, UHAL also owns the largest network of propane refilling stations in North America and is the largest installer of trailer hitches.

By cross-selling more services than its competitors, UHAL can continually differentiate itself from the competition while providing more value at lower costs as they build scale in each product. This is all right there on in their mission statement:

“To provide a better and better [moving] product and service to more and more people at a lower and lower cost.”

If that sounds familiar it’s because it’s basically Costco’s “Scaled Economies Shared” philosophy. Anyone who has ever moved before knows that it is 1) stressful and 2) expensive. Everything that UHAL does aims to solve both of these problems.

What we end up with is a company that has constantly out-grown their industry by taking share – not only from the DIY side of things where they are currently 50% of the market, but also by competing on price with the “I’ll just borrow a pickup truck from my cousin” crowd and by competing on convenience with the professional mover side of the market.

A combination of network effects, low-cost scale, and brand recognition has created a very protected position for UHAL’s moving segment, where several competitors have already tried and failed to slow UHAL’s market share growth – such as AVIS budget retreating from the space and Penske/Ryder shifting their focus to the B2B side of things.

U-Haul Self-Storage (13% Revenue, low double-digit long-term growth)

Self-storage is a natural extension of the moving business with obvious synergies between the two – i.e., movers often need a place to store their stuff, and putting both businesses in the same location adds convenience, cost synergies and revenue synergies. UHAL’s legacy self-storage locations tended to be on the smaller side (30k sq ft) relative to public peers, but everything they have invested in building up over the past decade has been on the larger side (50-80k sq ft) with all the modern enhanced security and climate-control one would expect.

Unlike publicly traded storage peers that have taken the strategy of leveraging up to buy existing independent self-storage locations at higher and higher valuations, UHAL has instead focused exclusively on conversions (repurposing department stores, etc.) and greenfield builds which always start with 0% occupancy and thus depress returns initially. UHAL funds this expansion through operating cash flow and by extracting equity from their more mature self-storage locations through refinancing.

The economics of self-storage are no secret (and they’re great). Fixed costs are high, so there is always the temptation to cut prices to fill capacity. However, once tenants are secured and high occupancy levels are reached, rent increases can be imposed. This, coupled with low maintenance costs and high operating leverage, means that returns can ramp up quickly with revenue basically falling straight through to the bottom line as these sites are rented up.

From here returns are protected due to 1) zoning, like with landfills, self-storage isn’t exactly the way a city wants to use its prime real estate, 2) scale economics with customers demanding clean, safe, climate controlled, 24/7 staffed, security guarded sites, which are better provided by players operating at the national scale, and 3) switching costs; people don’t want to constantly move from one self-storage location to another to save a few dollars.

As UHAL continues to grow its self-storage footprint eventually gravity is going to take over, meaning UHAL won’t be able to invest in new square footage faster than they can rent it up. At this point, we believe returns would increase dramatically for this segment.

U-Haul Returns on Invested Capital

We estimate that UHAL currently generates roughly low-double-digit unlevered returns on capital even considering that they are investing ahead of demand at the cost of utilization rates. While 10%+ unlevered returns might not be anything to write home about, we would point to the long list of asset-heavy companies with reinvestment opportunities and modest ROICs that have done exceptionally well over time: Rails, Pipelines, and Waste Management come to mind.

In these cases what matters is having an integrated asset network with density, which when paired with predictable, durable cash flows that can be levered up, as well as regulatory/capital-intensive barriers to entry, can lead to very attractive long-term results. Much of that is true for UHAL as well. And we would argue that more important than high excess returns is the sustainability of returns. A company with 40% ROIC due to a short-term fad is going to do much worse for us as investors than a company with a 10% ROIC and a runway of reinvestment in the decades.

For UHAL, 20-30 years from now people will probably still need to move and it is hard to see how UHAL won’t be the cheapest option for doing so. As Jeff Bezos says, the one thing he can predict about the future is that customers will want lower prices.

Conclusion

UHAL checks many of the same boxes that we like in our holding of Copart (CPRT):

• Long-term mindset of management, family-owned.
• Physical moat through landownership where zoning is difficult to obtain.
• Distribution advantages (advertising, physical network effect, cross-sell, etc.)
• Scaled economies that are shared (as bargaining power and utilization of fixed assets increase, savings are mostly passed on to consumers, much less aggressive on pricing than peers in both markets).
• Customer obsessed.
• Technology and data-driven (they were doing contactless check-out before Covid even hit).
• Significant reinvestment runway into a fragmented market (adding locations, trucks, self-storage Sqft).
• Simple business to understand.

The reason the UHAL opportunity exists today is because much of the market does not due to the fundamental work to understand UHAL’s long-term economics. They see short-term declining earnings when what they should see are very attractive investments with long-duration cash flows.

At the end of the day, one rarely gets the opportunity to buy a near monopoly with attractive reinvestment opportunities trading near asset value. Famed investor Chuck Akre has talked about “coiled springs” before – opportunities where a company’s real economic value is growing faster than the stock price. Similarly, Nick Sleep has talked about “focusing on ideas with the longest shelf life for compounding”. We think UHAL fits the bill for both, and it is hard to see how we do worse than low double-digit returns from today’s prices, with a lot of upside to that number.