Chit Chat Stocks - Uhaul (UHAL) with Sleepwell Capital

Episode Date: December 9, 2021

U-Haul is an American-based moving equipment and storage business. The company started as a trailer rental business focused on helping people move long distances. Sleepwell Capital brings his expert knowledge of U-Haul for a great discussion regarding the history and future of the company. Enjoy the show! Our Thursday Deep Dives are sponsored by Quartr, the new way of doing company research. Access conference calls, presentations, transcripts, and more for FREE on your mobile device. Download Quartr on the App Store here: https://apps.apple.com/us/app/quartr-investor-relations/id1552412128  Download Quartr on the Google Play Store here: https://play.google.com/store/apps/details?id=se.quartr.android  Special promotion through the end of 2021: Subscribe to 7investing with the code "chitchat" and get $50 off your annual subscription: https://7investing.com/subscribe/ Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Interested in more of Sleepwell Capital's work? Follow him on Twitter: https://twitter.com/SleepwellCap?s=20 Sleepwell's written deep dive on Uhaul: https://sleepwell.substack.com/p/is-america-ready-to-move-again?r=rteq6&utm_campaign=post&utm_medium=web Forbes article on the Uhaul family history: https://www.forbes.com/sites/luisakroll/2016/02/10/inside-u-hauls-rollercoaster-ride-from-nastiest-family-feud-to-market-dominance/?sh=9de8b6c3bb50 Rather watch us on video? Subscribe to our YouTube channel: https://www.youtube.com/channel/UCG5Ni-SI-jyrEsoNUhqftNQ  Contact us: [e-mail]  Timestamps Uhaul | (3:19) Industry Growth | (26:00) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. Today, we have Sleepwell Capital on the show, and we talk about U-Haul, which is a company I'm pretty sure most listeners are probably familiar with. Well, we have an international audience. That's true. We're global. If you're in the US and Canada, you know about the business, but yeah. What highlights do you have from the interview? Yeah. Yeah. So you described the unit economics of the self-storage pretty well. I was very surprised at what the margins of those could be at scale, but I guess it makes sense because of how minimal type of expenses you might have on those. Also describing the competitive advantages of

U-Haul, how it might be tough for a competitor to come in and almost impossible for a competitor to come in unless they're acting really, really irrationally. Talk about the physical network effect of all these shops around the country. You'll get into it more deep, but yeah, that's what I like the best. Yeah. I found it fascinating how what seems like such a, I don't want to say a boring business because the interview is kind of exciting, but what seems like a boring or basic business can provide such good returns. And it has really good economics, which he talks about. But before we get to the interview, we want to talk about our friends at Quarter. They are the investor relations app in your pocket. It's really easy to listen to conference calls with them.

They have it on iOS, Android. You can go ahead. You can look at presentations. You can listen to conference calls at 1.2 times speed if you're really smart. Or what else do they have? Presentation materials, stuff like that. You can add responses or reactions to conference calls. It's a concept that I really, really like as a consumer or as an investor. And I use it frequently pretty much every earning season. If I want to get up to speed on companies, I use it as well. So go ahead, check it out. It's 100% free. They have companies from all over the world. It's Q-U-A-R-T-R, no E, so quarter, Q-U-A-R-T-R. Follow them on Twitter at quarter underscore app. And last mentioned, before we get to the interview, you can use our

code chitchat for 7investing. You get $50 off your annual subscription. It's a holiday promo code. Limited time only. So get it while you can. Less than a month left on this thing. So if you're thinking of subscribing to 7investing, fantastic service. Try it now. We'll give you a discount. Okay. Without further ado, here's our interview with Sleepwell Capital. Welcome to Chit Chat Money.

On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital. and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. Welcome to Chit Chat Money. Today, we are welcomed by Sleepwell Capital. I believe,

is this second or third time on the show? Second. Okay. Second time on the show. And today we're talking about U-Haul, which is a business I imagine a lot of people have heard of or experienced, especially if you're living in the US. So I guess just right off the bat, what attracted you to U-Haul to begin with? Yeah, sure. And thanks for having me again, guys. So one thing I've realized as I've kind of involved as an investor is that I'm pretty attracted to those businesses where I use the products and services a lot. So back in 2014, I was in an investor conference, and a hedge fund manager basically did a stock pitch of the company. And first of all, I had no idea it was a

public company. And we can talk a little bit about this later. But basically, it's very under the radar. And, you know, as soon as I started hearing more about, you know, kind of him given, given the pitch of the, of the company I became really interested. So, you know, I kind of just went back and started doing some work on it. And probably a month after that, I started buying shares and basically owned it since then. And do you want to provide a little bit of like history about the company? So like how they came to be, I know they've been around for a while, if I remember reading that correctly. Yeah, exactly. So it was founded in 1945 by a guy named Ellis Schoen. So he basically realized that there was no convenient way to

move between one state and another one. I think he wanted to move his family from California to Seattle or something. And again, he was surprised that it was such a hard thing to do. So he decided to start a company where he would build trailers to rent them out. And he started making deals with, you know, gasoline stations and things like that. And the business started growing really exponentially in large part due to the interstate highway system being kind of constructed across the United States. So fast forward, you know, we're basically 70 plus years after that. I will touch really quickly on some family drama that took place in the 80s and 90s through the succession of basically the founder to his son, who is now the current CEO.

I'm not going to get too much into that because we could literally do another podcast on that. We could maybe link to the show. There's a very interesting Forbes article on that, so that could be helpful. But yeah, basically today, his son has been the CEO of the company um since uh since the 1980s and it's the biggest do-it-yourself moving company in the in the u.s all right and do you want to explain it's you know how the business works today and kind of the business model as a whole yeah for sure so it's actually quite an interesting you know organization because the actual name of the of the company is americo right and it's it's really a holding company that has three businesses. The first business is the moving business. The

second one is storage. And the third one is insurance, right? So the core business being moving, everybody knows and is familiar with the orange trucks, right? Especially those that are based in the US and Canada, because they don't operate outside this geography, right? So They rent out trucks and trailers to anyone that wants to save money and move by themselves. If we look at the moving market as a whole, anywhere from 12 to 14 million households move on any given year. Anyone that's gone through this knows that there are basically two things that make moving quite a particular experience. Right. The first is that it's extremely stressful. And the second one is that it tends to be expensive, especially if you want to kind of take some of that stress out from the from the experience. So where U-Haul comes in in their proposition is that they aim to solve both of these problems.

The company's mission is to provide a better and better product and service to more and more people at a lower and lower cost. So one way to kind of think about this is that they try to be the Costco of moving. right so it's a scaled economy shared uh business very much because they they want to be sharing the the savings that they can provide due to their scale um and kind of give the best convenience and cost to anyone that wants that wants to to move right so when you know like i have i had a lot of experience on this in college i'm sure you guys did too but anytime i wanted to move from my dorm room to my new college house with three friends. I rented out a U-Haul truck and they were always the ones that had the closest locations and the most convenience products as

well as the cheapest options, right? So on the do-it-yourself market, which is where they play, they have roughly a 50% market share. And if you look at the US and Canada, it's roughly 22,000 locations. Most of them are franchised and 180,000 trucks. So that's the core moving business. The other part is self-storage. So these two businesses basically are very complementary to each other because if you think about anyone that's moving or has self-storage needs, it's very likely that you're either going to need a truck or, or put your, put your stuff somewhere. So, right. So for, for the past couple of decades, uh, this has been a strategy of theirs to kind of offer both products in the, in, in the same place. And, uh, this part of the business

has been growing pretty, pretty nicely. And by now they're the third largest player in the, in the U S. All right. And they have these other weird business lines. Um, do you want to explain those quickly and do you think investors should follow those at all? Because I know it's such a small part of the business. Yeah. So that that's absolutely right. And this is, this is the insurance aspect of the company. One of, one of the, um, so it's, they actually do life insurance and property and casualty. Uh, the property and casualty part is, is actually a really good business because they're essentially insuring, uh, things like storage. And when you rent out the trucks, they give you the option to, to, to, you know, to pay for some insurance and, and they,

they actually underwrite them themselves under, under this part of the business. Uh, the life insurance part is, is kind of, you know, it doesn't really belong there I'd say, but, um, but it's been profitable as, as, as well as, as the, as the PNC side. So it's, it's nothing that, um, that I would worry about too much. I don't follow it as closely. It's, it's a small part of the business but it seems like uh like the family wants to wants to keep that in there and and uh it's it's not again it's not something that that i spent too much time on um the only other things i'd mention in terms of like the different line items that go into there there's there's there's also a pretty good uh sort of product and retail business if you think about

them selling you accessories and and boxes and things like that when you need to move that's That's a pretty good business that they have an offer on the moving and storage side. And then there's a newer business, which is called ViewBox, that we can talk about as well, which is basically a container that gets delivered to your house. You pack your things up. Someone picks it up and sends it over to wherever you need it to go. Okay. And yeah, let's move on to that first. They've been talking about that, I believe, on the conference calls a bit. But how big a part of the business is it? And what kind of growth do you think we could see from that UBOX stuff?

Does it go into a whole new market than just the traditional U-Haul business? Yeah, so it's been growing really nicely. I believe the most recent figure was around 50%. So it's obviously very, very strong growth on that side. um on an analyzed basis is is probably going to do a couple hundred million this uh this year um it gets thrown into the kind of the other revenue uh line item so at some point they're going to have to break it out and management has talked about this when it when it breaches a 10 level it's going to be basically a separate segment um and uh this is i mean it's pretty

impressive. I'll give some credit to management there because it's a pretty recent business that has more recently started to show on the earnings power and the growth of the company. It's been really nice to see that, especially coming out of the pandemic. Just for context, how big is the business? What's the market cap? Do you have any figures in terms of valuation and maybe some of the economics of it yeah for sure so market cap is is around 14 billion uh right now the business uh probably it will probably do oh yeah like five five and a half billion of total revenues this year uh last year was 4.5 and um yeah so those are those are actually you know those are kind of the big numbers um i can i can talk about valuation

later on as we kind of just get into some of the other things because i think it's important to to understand and get a little more background on like their competitive advantages and things and things like that right yeah no for sure and yeah we'll get into more kind of cash flow earnings and stuff like that on the second half i believe but to really give an overview you, U-Haul has been a durable grower and they've been gaining market share, or at least they have the lead in the market for them. What gives them that competitive advantage to sustain this market share or grow it? And why do you think it's so strong? Sorry, Ryan. Also, to add to that, who are their competitors that they'd have an advantage over? Good point. All right. Yeah.

Sorry. Go ahead. Yeah, for sure. Let's talk about that. So the biggest advantage that they have is the physical network effects, right? So we talked about the number of locations and trucks that they have. If you think about their next biggest competitor, which is budget truck rental, right? Which is, it's part of the Avis group. They have nine times as many trucks as they do

and 25 times as many locations, right? So if you, for example, want to move from Marfa, Texas to El Paso, you're going to need a location as close as possible to those two points, right? Because you want the fastest way and the most convenient. As we talked about, this is already in itself a very stressful experience, and you also want to pay the least, right? So given U-Haul has built up this network for the past 75 or so years, it's been incredibly

hard for a competitor to compete with this. And it just keeps getting stronger and stronger because they keep expanding their physical presence and expanding the fleet. So this, again, this network effect is a super strong note that is very hard to replicate because of how capital intensive it has been to build up this physical presence. um so the second one i would say is the fact that they are extremely focused on the customer and providing um sort of the low-cost experience so it's it's not only the fact that they're already the biggest and and have all this scale there's the fact that uh a smaller competitor just wouldn't be able to compete on passing on those savings to the to the customer because it's just completely beyond economical, right? And there's many examples of this that we've seen in the past,

if you compare rates to the competitors like budget, and there's some other ones like Penske and Ryder, but they're much more focused on the B2B side of the business. And if you look at budget, actually, it's an interesting case study because they've been slowly retiring out of the business. They used to be much bigger a couple of years ago, but it's a very tough business to be in if you don't have the right size. So as a result, they've been sort of slowly stepping away from it and being very strategic in terms of the parts of the market that they're playing. And do you think the competitive advantage for, I know some people have trouble understanding it, do you think it's a similar one to a UPS or Amazon logistics where it just takes so many

nodes across the country for it to make sense and it can cost a lot less once you have that scale is that part of it or is that only a small part of it i think that the comparison to to ups and fedex and and these shipping and logistics companies is is is fair in the sense that the network is is super important where i think it's very different is that in in that in that mark in those markets, you have a lot of different players and you have Amazon trying to base, you know, they're already a pretty significant players. And I would be, I'm not an expert on that part of the business or anything, but if I were to look into that industry, I'd be very concerned in terms of what Amazon is doing and spend some time in that. I don't think we see

anything similar in U-Haul's market, as I explained, talking about a little bit of the competitive landscape. Interestingly, a little bit of their business has been companies like Amazon and FedEx renting out their trucks when they don't have the capacity to... They don't have their own trucks, so they go out to U-Haul and rent them out. That's a small part of the business, but I'd probably be interesting to mention that. Right. And right now, you mentioned that growth is going to be pretty strong from last year. And we've seen movie equipment rentals really growing quickly, at least just right now. What's driving that growth? And do you think it's sustainable? What type of growth? I know it's very hard to predict, but kind of what type

of growth do you think investors should expect over the next few years or a decade or something like that yeah so covet was definitely a kind of a blessing in disguise for for the company um they're seeing you know demand through the roof for for all their their moving trucks as well as as a storage um the question of of how that's going to play out over the next few years i i think it's obviously the million-dollar question because, as we'll talk about in a bit, it's going to get into the valuation question. So, last quarter, the company reported top-line growth of high 20%, right? So, that's pretty incredible for a company of that nature that typically grows at mid to high single digits. And they also saw a lot of incremental margins that drove

profitability. The main drivers behind the growth of the past year and a half as we've been in this covid environment um has been people moving from you know what they call out of town moves and if you look at the moving rate as a kind of as a as a percentage of the of the population it's interesting because it was actually down uh last year but what happened was that because u-haul was sort of operating at at full scale for for the entire time the demand for their own products was actually up. And it feels to me like they've taken a lot of market share so far, and they were not only able to increase their own transactions,

but they've been taking some pricing as well. The pricing comes from both kind of revenue per transactions, as well as the out-of-town moves that I was talking about. Because if you're moving, I'm in Miami right now, if I rent a U-Haul and I move from Brickell to whatever, Key Biscayne, that's going to be a lot cheaper than if I move from Miami to Tallahassee, right? Because it's a much further distance. So during COVID, we saw a lot more of those moves, the out-of-town moves, which tend to drive pricing a lot more, right? So those were the two big drivers. I think going forward, it's going to be interesting because the demand we know is there. Now, I wouldn't be surprised if we see a drop in revenues next year, but I would still expect it to be probably close to what we saw last year, which was still a really good year. And what I think is interesting is if you look at the long-term trend of the U.S. moving rate, it's been coming down for the longest time.

And U-Haul, despite that, has been able to still grow their top line and kind of increase their transactions year by year. So if for any reason, after COVID, we see some kind of sustained reshuffling of people moving between cities and states and things like that, U-Haul is very likely to benefit greatly from that in the next couple of years. If we don't, they've proven themselves that even with a decreasing mover rate, they've been able to keep taking share and people just keep using their products more and more because, as we talked about, they're the most convenient and cheapest option out there. You mentioned briefly the CEO. What are your thoughts on management overall, and what do you think of him? yeah so the way to think about this this company in terms of management is it's basically a family owned company that happens to be public if if you read i always tell people to read their their or listen to their earnings calls because they're one of the more kind of interesting and and

transparent and he's really upfront about what's happening in the business and you know he's he doesn't he doesn't talk at all like the like like a public company ceo and so he's been he's been around since 1986 uh i think he's done a great job of you know really defining the the the mission of the of the business and focusing focusing it to the to where they should be focusing on um you know he thinks really long term he talks literally thinking 10 years out like he'll he'll he'll talk about that a lot in, in the, you know, in the earnings calls and, and investor investor events, et cetera. They're not giving out guidance. He's very under the radar. You know,

he's, he's very conscious about spending the company's money. He stays in motels. So, you know, having followed him for a couple of years and kind of looking at, at how they, they operate, I'd say it's a very high quality management team. And there's been, you know, there's been some, you know, we can call it volatility on sort of the quarter to quarter basis. And sometimes I think certain investors get a little bit stressed out because, you know, there's a mismatch between their time horizon versus what they're actually investing on and thinking about. So I just think it's very important to be cognizant of that fact that these guys don't really care about what they're going to make in the next year or two.

They're really thinking out long term and the business can see some noise in between. But if you pull up a long-term stock chart for the past 20 years or whatever, you'll see that they've been able to execute and provide some pretty handsome returns to shareholders. Do they have high insider ownership? Yeah, absolutely. So the family owns around 40% of the stock. and they also have an employee stock ownership program um that that i don't have the exact number in front of me but it's it's a pretty decent it's a pretty decent size as well so that the employees are are pretty big owners of the company as well and it's nice they do it they

don't do the stock options if i'm correct the share count has been pretty flat they do uh yeah it's been super flat yeah yeah it's not a i don't know it's a it's a welcome site seeing just the flat chart yeah and it's funny you'll hear things like on the on the conference calls like hey why don't you split the stock it's it's a 700 stock right and and i was reading a transcript last week and he quoted uh mark leonard from constellation software he's like oh look at this other guy his his stock is at it's 2000 like i think we can still we can still we have ways to bill and i thought that was pretty funny but yeah he's basically like yeah no we don't we don't care about that all right interesting okay i have a bunch more questions but before we uh get to them

we're gonna hit a quick break don't you wish you could just hit skip on the worst parts of your life you know the same way you can skip an ad i get it i'm siaya and i live in ice cove i've made some questionable decisions that didn't end up the way i planned and today i'm still figuring it out somehow things usually get worse before they get better apparently that's how i roll so bundle up and come along for the bumpy ride stream a new episode of north of north tuesdays on cbc gem this episode is brought to you by kpmg as a business leader how can you innovate build trust and move forward in a digital era kpmg can help by bringing together the right talent and technologies generating insights that spark opportunities to explore their thinking

visit reed.kpmg.us slash opportunities this episode is brought to you by lakinta by windham here you are miles from home and ready to start your vacation good thing you're staying at lakinta by windham they have free high-speed wi-fi to stream all your favorite movies and in the morning get fresh waffles with their free Bright Side Breakfast, or squeeze in a workout at their fitness center. Either way, you're ready to conquer the day. Tonight, La Quinta. Tomorrow, you triumph. Book your stay at LQ.com. Okay, welcome back in. I guess before we get to some of the questions we sent over before, something that came to mind when you were talking earlier is that there is, it seems like a very large company that owns a lot of the market. And so

part of me thought like the seat they they might be somewhat saturated like is there still room for growth within that within the core moving business or is it going to have to come from these ancillary products yeah no that's a very valid question for sure i think there is definitely still growth on the on on the moving business if you know long term call it the last 10 20 years It's a business that's grown at high single digits pretty consistently. One thing that management likes to point to is the fact that every time they open up a new location, the demand is there. There's rarely been any cases where they enter a new market, a new small town in the middle of, I don't know, Nebraska or whatever. but they've given out the example multiple times that their constraints on growth is really about

where they are located. As long as they still see that, they're going to keep opening up new locations and expanding the fleet. I gave out that figure of 50% market share on the do-it-yourself market, but I think you have to take a step back as well and think about the broader moving market because there's also the moving the moving services company right where you actually pay thousands of dollars to someone to help you move so they're in some ways also competing with them because if they provide a good enough product that's convenient and and pretty seamless that's an option that people will will consider they're you know they have you mentioned ancillary products i think it's it's interesting because i could actually i could actually move

with a u-haul um without you know without it being as as as stressful as as you would think they have a network of moving helpers for example that um has you know thousands of them across across the country. So if you really just wanted to rent the truck and hire someone to help you move, you could do that and you'd still end up paying much less than you would if you were to hire an actual moving company. And then there's people that decide to kind of just move on their own and ask their cousin for their pickup truck and things like that. And all of this is to say that as long as they keep providing the best, cheapest, and most convenient product, I think they're just going to keep taking market share. Okay. And then another question I have,

it seems like they're spending a lot of their operating cashflow on CapEx. So how do you go about valuing the business? Yeah. No, that's one of the most important questions when it comes to this business. So it's very much tied to what I was saying before, in terms of the family orientation and how they think really long term, right? So their biggest growth avenues for the next decade are keep expanding the moving business, right? So that's going to be new locations and expanding the fleet.

And the second, which I would argue is the more interesting and likely being overlooked by the market um is the storage opportunity right so self-storage is if done right is is a very good business right like you would you would think and and the the common you know the the common thought is is that it's super commoditized right but when you have in the case of in the case of u-haul that You have a complimentary product, and at the same time, you have, you know, years and years of experience operating in this market and, you know, really understanding the differences on a localized basis of how these storage units get filled up, how much it costs to build them, the return on investment, etc. they've proven to be really um adept at at you know expanding this this part of the business it's growing basically at 15 percent more recently with with with covid it's actually growing above 30 percent and most of their expansions are by not by buying self-storage

which is actually pretty expensive if you buy an existing unit but they're basically either building storages from the ground up or converting units so for example a couple years ago um they did a a deal with with sears out of bankruptcy and they bought um i forget the exact number but it was a couple of of big like sears stores or kmart stores that they're converting to storage units now obviously this takes a longer time but these guys know really well how this units are gonna operate and the occupancy rates that they that they can have in maturity and and thus the ROI, right? So what's happening here is that they're seeing these opportunities, again, thinking really in the next five to 10 years, and they're taking all their operating

cashflow and reinvesting it back in the business. And that's how you can sustain the really attractive growth rates that I think the company can have for the very long term. i'm just looking at it now and it looks like they have 40 free cash flow margins which was much higher than i would have thought initially operating operating cash flow margin sorry um what are their what are their primary costs what are the input costs so cost of goods sold what does that mostly consist of yeah so there is you know on the on the operating expense side The biggest one is basically the personnel and labor costs and maintenance, right? Because these trucks obviously get used up a lot, and they need to be kept at a certain standard, okay?

So there's that part. You have obviously a big depreciation expense as well from the fleet and the storage units. You have commissions that you're paying out to the franchisees that operate the locations. And yeah, so those are basically the biggest costs. In terms of the 40% margin that you quoted, it was a very particular year in the sense that they were over-earning and there's all these different kind of moving parts that went into that. And we can get into this when we talk a little bit more about valuation.

But from a free cash flow basis, well, because the other thing is that the operating cash flow is net of depreciation, sorry, gross of depreciation. So you'd have to sort of account for that on the maintenance CapEx side. That's why it looks pretty high. But either way, during COVID, they were over-earning on that sense because of what we talked about in terms of the demand of their products, etc. And just kind of pinpointing down with a company that requires so much capital expenditures, the great thing about that is it makes it a lot simpler to get a return on invested capital number out there. What, you know, how do you estimate kind of return on invested capital for this business and how important is it for the investment to go well over the long term? Yeah. So because of the fact that, as we talked about, most of the free cash flow is being reinvested into the business for growth reasons.

There's, you know, I like to think of it in terms of what would the business look sort of on a steady state, right? So, if we make those adjustments and kind of take out the growth investments that we know are being made on the self-storage side and expanding the fleet, ROIC is probably somewhere around 12%. So, I wouldn't call that number sensational, but I would argue it's actually quite decent for a couple of reasons. The first one is that, first of all, I'd be very confident on that number either staying at those levels or increasing over the long term. So that makes me very comfortable to hold a company like this during that timeframe. The other part, which is important, is that this business supports leverage. So as an equity holder, you're getting the benefit of that leverage. And if you look at their returns on equity over a full cycle, it's somewhere around 17% to 18%.

So I'd say it's a very good result as a shareholder if they're able to maintain that over the long term. Yeah, especially with that runway for reinvestment. I mean, that's the big question is how much opportunity is there. So you're not seeing that at the moment. And I don't expect management to return any of that cash. I mean, they have a special dividend that they pay out sometimes, but it's pretty symbolic. It's very small. So to me, the bet here is, you know, it's a duration bet, essentially.

I'm okay waiting for management to do its thing, and I have the confidence and disability for them to keep executing and generating these returns. And down the line where, you know, when they reach the point where they want to slow down some of these investments and maybe they feel like they've reached maturity in certain parts of the moving market or storage, we kind of know what the business is going to look like by then. And it's just going to be a cash flow machine. Right. And self-storage is such a big growth opportunity for them. it's probably the fastest growing segment, at least correct me if I'm wrong. What sort of unit economics does self-storage have? Does it have different margins than this moving business?

I mean, what should investors expect with that as it matures? Yeah. So very important question. In this fiscal year, self-storage is probably going to make between $600 to $650 million. It's growing very nicely, as I said, above 30%. That's basically going to be more than 10% of the business at this point. But I think what's most important is it's very important to recognize that because the way that they're expanding into this business and they're buying, you know, ground, they're buying conversion units that they're converting and also kind of building on the ground up. There's a lot of costs that come online on day one that you're not really generating any revenue. And you might have to wait sometimes two as much as three years for them to start operating the store and filling up the units. So there's a big drag in that business as they keep expanding.

The returns that they target on that part of the business are north of 10%. but again there's a very important debt component to this because it's a super predictable business this is not this is not like moving that it's it's going to be a lot more bumpy right like as soon as you have one of these storage facilities operating at 90 95 occupancy like it's a it's great business and at maturity we know that they have a very similar margin profile than some of these big competitors like public storage and extra space so the the operating margins here are somewhere between 60 to 70 percent wow it's a it's a cash flow machine basically that's wow that number definitely surprised me i was i was thinking in my head i was trying to predict it

like what was it 20 25 i mean look at look look at some of these companies um psa is is the biggest one they they trade at like i think it's like 12 maybe even more times revenues really because they make so much money we've we've kind of talked about uh i guess we talked about it more on the first half but we talked about their physical network effect a little bit um and how that kind of gives them a competitive advantage how hard would it be for a competitor to disrupt you all? Well, I think it will be incredibly hard and for anyone to kind of consider doing something like this would be pretty irrational from, from their part. Like I can't, I can't really envision any other company that would have the capacity to suffer through, through some of

this with such an uncertain outcome right um it's it's just yeah it's just really really hard for me to to to foresee if we look back at i think it was in the 90s when some of these competitors were actually more more more aggressive and and present that we were that we were talking about um with when the market had you know three or four players their returns were just not as not as good. Now, U-Haul was able to sort of win that battle. And as we've seen, the three main competitors have basically retrenched. So Ryder and Penske are basically now focused on B2B and the commercial business. And as we talked about, budget has been sort of reducing their fleet on this part of the business as well. So I think that's one of their biggest

modes and in some ways it's another reason why i think the roic being you know kind of in the 10 to 12 percent range um that's probably the right level in my mind because if if they were able to do kind of 20 plus that would probably uh make some competitors kind of be more interested in the in the business so i think it's kind of in that sweet spot where they make a very decent return on their investment and on their equity. But at the same time, it's hard enough for a competitor to consider getting into this market. Right. And, oh, go ahead, Ryan. This is kind of a random question, but is their performance tied, I guess, to the housing market at all?

I'm just kind of thinking about people moving and self-storage. or is that not something you've looked at or maybe it doesn't matter yeah the the the big metric that i mentioned is is the moving rate um so i think there's yeah i'm not i'm not sure exactly about about the the housing market um i think i mean they they lost some money on on the on the great recession but it wasn't anything it wasn't any anything concerning um and they got you know know, they recovered pretty, pretty nicely the years after that. But yeah, the more relevant metric is really the amount of households that are moving on any given year, because that would just give them more and more opportunities to serve

more clients, right? Yeah. All right. Well, last question, let's wrap things up with thoughts about valuation and anything that could go wrong with U-Haul investment. Yeah, for sure. So look, as I mentioned, this year, given that it's been kind of a perfect year for them in so many ways with the amount of people moving across cities and the demand for all their products, including self-storage, they're going to make a lot of money. it's probably going to be $45 per share or something like that. So the way that I think

about this going forward, so a more normalized year, assuming next year, I think it's probably trading at 20 times earnings. And again, I'm using those numbers because this year is going to be just an incredible year for them right so if if i assume they're trading at at uh at 20 times uh earnings for for the next year i'm pretty confident they can grow earnings for a very long time in in the low double digits um so and the way i get to that is is basically you know kind of mid to high single digit growth and sort of a normalized EBIT margin going forward that is going to be, call it in the 25 plus percent range. Now that's close to where they were last year, which was also a good year.

But remember, you have to take into account the fact that self-storage is growing very nicely. And those dollars are going to be coming in at a much higher rate. So I do think, and I want to stress this out again, the way to think about this company is really kind of five plus years down the line. And, you know, at that multiple, I'm pretty comfortable holding the investment, knowing, you know, just kind of the track record of the management team and the visibility and confidence that i have on the on the business going forward now you know i'd say it's it's around these levels it's it's pretty it's kind of close to what i would call fair value um you know you probably do it in a five-year you know 10 10 plus irr from here um but this

used to be much cheaper you know earlier earlier this year and i was and and you know i was talking about it, um, back, back then that the good news is, you know, for anyone that, um, that wants that, that's been looking at it is I, I'd say it's a, it's a pretty volatile stock. Like we know there's, there's noise on, on a lot of these numbers, as I, as I explained. So I, I wouldn't be surprised if, if, if it, you know, if at any point in time it, it, it goes through, through another, another cell. But that's, that, that's kind of where I'm, where I'm at in the, in, in the valuation at this, at this point.

What do you think could make this a bad investment? What are some of the biggest concerns or risks? Yeah. Oh, and I'll mention one more thing before going on to the risk, but the other part that's worth keeping in mind is that I think there's a very interesting embedded option here. If we do see a prolonged period of the moving rate kind of reversing and And people really, you know, moving across cities with, you know, the post-pandemic world and maybe things like remote work, staying and being more normal. So that will be a huge benefit to them because, as I explained, for a really long time, this moving rate has been coming down and they've still been able to grow pretty nicely. So if that does reverse, I mean, that would be very beneficial to all their businesses. um so that's that's also i think relevant to keep in mind in terms of of you know the biggest risk

and and what what could go wrong here you know we talked about competition it's it's obviously important to you know always pay attention to that and and you always want to be on the lookout for any sort of irrational player with with tons of money and and entering the market um i mean i wouldn't i i wouldn't say the the probability of of that is it's i mean it's it's not zero right like we i i said it would be incredibly stupid for anyone to try but that doesn't mean i mean we've seen crazier things out there right so that's that's definitely something to to to keep in in mind i think that similar thoughts apply to um to the self-storage space because it's it's obviously a very uh fragmented space and and and we'll see you know for now things have been working

really well on on that part of the business but again if we see more you know more investment dollars flowing into that and it starts to get more competitive to to build these these new properties, et cetera, it's going to be, it's going to be harder for them to, to, to make those returns there. So those are, you know, kind of competition on those two parts, the moving and the storage side is it's important to, to keep track, um, to keep track of that. Um, I've had people ask me about sort of the autonomous car, uh, being, being, being a risks. Uh, yeah, it's, it's definitely an interesting question i mean personally at first i think this is further down the line than most people realize but i would say that if anything it's probably an opportunity for

them more than a than a risk because you you probably would still need some sort of of network of of of you know of facilities to kind of manage this whole fleet so they're they're kind of doing this already in many ways and and they've been you know they've they've been pretty decent at adapting to to newer technologies like you can in in most of their rental trucks nowadays you can you can do like contactless rentals and you just use your phone and and literally get to the truck and and unlock the unlock the truck with you with your phone without ever having to talk to an agent so you know things like that and and i talked about the the u-box which is the the container opportunity that they've that they've been working on so they've i think they they seem pretty

cognizant of of the risks that are that are out there that the ceo always talks about competition as well so it's it will be something that if if at any point uh becomes um a concern for them or they're starting to see um you know big moves in that in that part of the market i i would think they react to that pretty quickly all right one last question um are all their uh locations franchised out or are some of them owned no they own i think it's between two thousand and three thousand of them are our company owned and they have 22 000 in total okay all right um i think that's all the questions we have uh for listeners that wanna uh keep up with you where's the best place yeah so my my twitter always available to to chat over over dms at sleep well cap uh i also

have a sub stack sleepwell.substack.com i wrote a piece on on u-haul back in june so if you want to take a look at that as as well we can we can link to that right and good stuff on uh the audio industry. Yeah. Labels. Thank you. Recent one on audio books or a recent one inspired by Spotify's acquisition of the audio book one. I like that one as well. Yeah. We can do the next, the third podcast. We can do something audio related. Yeah, for sure. Perfect. All right. We want to remind our listeners that Brett and I are not financial advisors. Anything we say or discuss here on Chit Chat Money is not formal advice or recommendation. We are, however, general partners at Arch Capital so clients may have positions in the securities discussed in

this podcast. Thank you all for listening. We'll see you next time.