This Company Is Still Cheap Despite the Recent Run-Up
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Companies that are the best in their industry deserve a premium valuation, but investors in AMERCO (NASDAQ: UHAL) do not have to pay up at its current market price. AMERCO's main business, U-Haul, is the largest of its kind in North America. In a business where scale is as important as brand, U-Haul's leadership on both qualities makes it a valuable asset for shareholders.
Best in the business
U-Haul's fleet of trucks and trailers is the largest in the nation; its extensive dealer network puts those of Penske Automotive Group (NYSE: PAG) and Avis Budget Group (NASDAQ: CAR) to shame. The enormous scale of U-Haul's operations relative to its competitors enables the company to grab market share through price reductions.
As a result of using its scale to scoop up additional market share, U-Haul has achieved a 50% share of the market in North America, compared to only 20% for Avis Budget and Penske Automotive -- combined.
But what is really impressive about U-Haul is how it got to be so dominant. Back in the 1980s, Ryder (now a subsidiary of Avis Budget) was a formidable competitor. In fact, competition from Ryder was so fierce that AMERCO started investing in completely separate businesses as a way to diversify away from the crumbling do-it-yourself equipment rental business.
Luckily, current Chief Executive Officer Joe Shoen wrestled the company away from his father and deftly navigated the company through a series of acquisitions and changes in strategy that enabled the company to stymie Ryder's attack. U-Haul has been extremely sensitive to market share grabs by competitors ever since, which has encouraged its two closest competitors to back out of the market.
For instance, Ryder accounts for only 6% of Avis Budget's total revenue and does not receive management's full attention. Avis Budget's golden goose is its car rental business, which receives most of the capital expenditure allocation. For example, the company announced its acquisition of Zipcar, which fits in better with the car rental business than the do-it-yourself equipment rental business.
As a result of Ryder's lowly status within the firm, Avis Budget's management announced its intention to wind the business down over the next several years. Given U-Haul's penchant for grabbing market share, it seems likely that the market leader stands to benefit most from Ryder's demise.
Penske's do-it-yourself equipment rental business is in a similar position within the firm. In this case, Penske's golden goose is its auto dealerships. The company makes most of its money from servicing cars it sells through its nationwide network of dealerships and service stations.
Although Penske's truck rental business is expected to remain an important part of the firm going forward, it is primarily focused on the commercial truck market -- not the do-it-yourself renters that U-Haul targets. As a result, the do-it-yourself segment does not receive significant cash allocations for expansion -- making U-Haul's market share much easier to defend.
Why you should buy
U-Haul is the largest business in an industry where scale matters most. Its 50% market share is five times that of its closest competitor, which allows it to charge lower prices in order to pick up market share -- and charge higher prices once its market share is solidified.
Despite being the best company in a mature industry, the stock trades hands at 12 times earnings. The fact that few people have heard of AMERCO does not mean it should not trade in line with Coca-Cola, which currently trades for 21 times earnings -- U-Haul's competitive position is similar to that of the iconic soft drink maker. Long-term investors who buy the stock below $180 per share will likely do much better than the market over the next five years.
Ted Cooper has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!