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UHAL : Second quarter Revenue better than expected. Increased maintenance and repair and lower truck sales pushed earnings down.

11/10/2017
By Ian Gilson, PhD, CFA

NASDAQ:UHAL

AMERCO (NASDAQ:UHAL) reported its second quarter results after the market closed on Nov. 08, 2017, followed by a conference call the next morning.

Revenue was better than expected but operating expenses were much higher than forecast.

There were a number of factors that impacted the drop in operating income. A bonus was granted to frontline managers ($20 million), fewer trucks were sold (this impacts depreciation), and, as mentioned at the recent virtual conference call, trucks for sale were not in a first class condition. Increased maintenance and repair over and above normal expenses cost, in our opinion, an extra $25 million.

These additional maintenance expense are expected to continue through the next nine months, but at a reduced and declining rate. The trucks were generally about town vehicles. Ford had a truck recall that also affected availability of trucks for rent. The cost of repair is born by Ford but the down time impacted revenue. Currently U-Haul has about 5,000 trucks for sale before the fleet is in balance.

Most other expenses were in line with our expectations. We have adjusted our forecasts for the increased level of repair costs.

The recent two hurricanes in  the SE United States did not have a significant impact on earnings. Although operations were suspended in both cases transactions increased as people rented trucks to move out and then return after the hurricanes moderated. Box sales actually increased.

Overall, truck rental transactions increased in the second quarter as compared to a year ago at a faster rate than truck revenue. In our opinion this was more of a mix change than the result of discounting.

The sale of the facility in Chelsea, NYC, occurred in October, 2018. The net before tax profit was about $188 million. For accounting purposes it will be taxed at close to 35% but this is a non cash event. We have excluded this from our forecasts, treating it as a non-reoccurring event. The company will purchase other real estate to offset the sale, in which case the profit is deferred as a  rule 1031 exchange.

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