05/26/22 06:29 AM EDT

UHAL F4Q22 RESULTS - BIG OOF ON DIY | 5.26.22 | (UHAL)

Rob Simone, CFA

@HedgeyeREITs

Takeaway: The Quad4 reaper is coming for UHAL

Hedgeye Cartoon of the Day: Bear Down

Ticker: UHAL

Subsector: Self-Storage

Headline: DIY-driven (both top- and bottom-line) earnings normalization underway

Best Idea Short Amerco (UHAL) reported a worse than expected fiscal 4Q22 last night driven by lower DIY equipment rental revenues and margins, with Core EPS of $2.03/share missing Hedgeye at $5.51 by about -63% in the seasonally weakest quarter for moving and rental activity. This includes a realized tailwind from a lower effective tax rate in the quarter at ~18% vs. Hedgeye at 23%. Just as a reminder, each quarter UHAL books GAAP gains on equipment sales (~$27mm, ~$54mm & ~$214mm in the last three years, respectively) which contribute to the headline earnings number. We add those + any real estate gains back and tax-effect them in our calculation of Core EPS to derive a "recurring" underlying number for the operations. UHAL is essentially uncovered by the sell-side and does not provide a full outlook, so there are few markers in the ground with which to measure, but we would stress two things: (1) the RoC is slowing significantly for a company likely at peak-earnings, in addition to margin pressure from below, and (2) it is slowing faster than our expectation coming into the quarter which implied a ~50% earnings normalization over the next fiscal year. See Figure 1 below for full variances, but the key components are:

Self-Moving Equipment Rental Revenues: -$3.09/share, grew +11.5% y/y in the quarter vs. Hedgeye at +20%. The sequential walk for the RoC over the last 5 quarters is: +33.1%, +58.2%, +26.7%, +20.7% & +11.5%, so clearly decelerating.
Products & Services Sales: -$0.84/share, declined -1.7% y/y vs. Hedgeye at +10%.
Other Revenues: -$0.42/share
Operating Expenses: -$0.98/share, opex came in at 67.6% of revenues excl. products & services vs. Hedgeye at 65.8%, so margins deteriorating. In the 10-Q filing management called out higher personnel, fleet R&M, property taxes, payment processing fees and U-Box freight costs as driving the elevated opex growth. As expected, supply chain issues and delays at OEMs are negatively impacting the equipment replacement cycle, which is both (1) driving up R&M costs in the current period but also (2) leading to a longer-term deferred capex cycle to replace aging trucks and equipment when available. The former opex line is just growing faster than we expected, and on the latter we would strongly recommend that investors model in deferred capex in coming years + self-storage development costs. I.e., the current ~$2.6 billion cash balance isn't the "real" cash balance, with much of it likely earmarked for future expenditure.
Taxes: +1.19/share on a lower effective rate.
Self-Storage Revenues were more or less right on the screws.

We love the business, especially the increased penetration of higher-margin self-storage rent, but the reality is that UHAL is significantly over-earning coming out of COVID's elevated relocation activity and heading into a lengthy and deep Quad 4. As my colleague Jay loves to say the 6.5-7x in-place EV/EBITDA multiple that appears "cheap" is really a "value trap" on peak earnings. On a forward basis that number is closer to ~9x with an associated ~25-30x multiple on core operating earnings. The RoC will drive the stock from here and we are just beginning to come off peak earnings, so staying short in Quad 4. See Figure 2 below for a chart of UHAL's "rolling" LTM Core EPS as calculated by Hedgeye.
While we do not think this is likely, we will again request that management begin to allocate cost between DIY equipment rentals and self-storage so as to arrive at segment margins, especially as higher-margin self-storage becomes a larger portion of the business. While we agree there is overlap between the two complementary businesses, it is at the same time possible to separate out and allocate traditional real estate expenses to storage, namely property taxes, personnel expenses (perhaps one or two employees of the larger headcount at each site), utilities, property R&M, rent where applicable and other facility operating costs. The balance of the headcount can be allocated to DIY. Just a suggestion that could be helpful for investors to better understand and model this business, which some regard as "black boxy."