Over the past five years, I've been building and iterating an investment style that dances between concentration and diversification. Here is a look at the history of my portfolio since I started tracking my investment performance in earnest almost 5 years ago. I am pleased with the results which have come along with a unique portfolio style. The main thesis is trying to ensure my portfolio is diversified among market factors, but extremely concentrated in nature (8-12 names) so that stock-picking is the main driver of performance. 

Performance:

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Philosophy:

I have four baskets I place businesses/stocks into: special situations, value, quality, and growth. Within the four, there is really just two. Special situations and value generally go together and act as counterweights to quality and growth. The best combination is getting all four, but that is difficult to find and may come around once every couple of years. This is something like Google in 2011, Meta just last year, or maybe Alibaba today? These situations are never a certainty. In all three situations just listed there was and is very reasonable and compelling counterarguments.

Oftentimes these baskets of stocks move in opposite directions or have large variances in performance depending on the market environment and cycles can be a decade long. One can also define each of these categories in countless different ways. The main idea is simple: I don’t want to be at the behest of market factors and I want my stock selection to determine my performance. See below from JP Morgan for examples of the prior decade’s performances.

In a perfect environment, I allocate my book 50/50 to value/special situations and quality/growth to avoid a factor bet. I bucket loosely and many names will have multiple characteristics or secondary buckets and names can move into and out of each category. The highest I will go as far as the split between value/special situations and quality/growth is 70/30. Again the bottom line is I don’t want to pick factors and I don’t want to underperform for a decade because of the factors I select. I will let the market dictate the attractiveness of the opportunity set and my portfolio exposures will fluctuate within defined parameters based on that opportunity set.

Being dogmatic is okay for some, and the ability of growth and quality investors to explain they are also value investors is not difficult. If your whole portfolio trades for >15x EBITDA or >20x earnings and each company is growing revenues at >10% with a certain ROE you are investing in factors even if you believe that quality/growth name is “cheap”. These names will all move together. To be clear, I think it’s perfectly fine to only pursue one style of investing, but the investor needs to be intellectually honest with oneself and realize that most likely their factor exposure, not their stock-picking is the most important driver of their performance.

This seemingly obvious idea is commonly misunderstood or ignored even at the most sophisticated levels of both portfolio managers and capital allocators. I haven’t done this study, but my guess is substantially all the active fundamental public stock-picking firms that grew over the past decade are quality/growth investors (outside of the pods/quants). If you do the work to compare their performance to the MSCI quality or MSCI Growth indices, many times their alpha goes completely away, however, they have the best returns over trailing 3, 5, and 10-year periods and thus receive the most inflows and the least outflows. Did they become smarter or did their factors work? Did value guys become dumber or did their factors go out of favor?

If the new quality/growth cohort is not able to shift its style, performance will be in line with such factors for the foreseeable future. The next decade, or when factors eventually shift, you’ll see the inevitable rotation and value/special situation firms will come back in style, and quality/growth-only investors will have to start paying attention to value to survive.

Benchmarks

Over the past five years, approximately ~50-70% of my portfolio is US securities while 10-30% has been EM/Frontier with the remainder being ”Ex-US” or developed economies. I don't focus on this in much detail, but I do try to have a global portfolio across the market cap spectrum. For this reason, I generally treat ACWI as my primary benchmark. The ACWI has similar exposures, so my key overweights are really toward small cap and EM. See the ACWI exposures below.

If I were to be more scientific about it, I would utilize a benchmark of 65% Russell 3000, 20% MSCI EM, and 15% ACWI Ex-US. This has performed very similarly to ACWI, so I don’t include it in this article. If I wanted to get extremely scientific I should likely use a global SMID-cap index for ~40-50% or so of my portfolio as my largest overweight vs passive and largely free indices is having a lot of mid-cap and small-cap exposure. This would meaningfully improve my alpha profile. Alternatively, you could argue all strategies should be benchmarked against the SPY. While this does not make much sense to me given the profile of the portfolio, if you were to do so, you’d see my alpha profile decline.

Portfolio Makeup

Below is what my current portfolio looks like. While I like my portfolio today, I am in constant search of new opportunities and have a higher cash balance than I would like. Typically when there is a lot of Berkshire and cash in the portfolio it means I don’t have that many bright ideas. Growth and quality opportunities continue to be priced at a premium and my top positions have worse risk/reward from when I first invested (besides ATEX and gold miners).

CREX is a very small position but moved by +50% since my entry. I am unlikely to size up a position if that occurs. I am continuing to do more work on a couple of ideas like LPRO which is a VERY small position, but the market continues to move higher and I am seeing a lack of new ideas at attractive prices. 

I’ll discuss position sizing in a separate post.

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Below is how I “bucket” my current portfolio.

I’ve written a couple of articles thus far in my substack journey on UHAL, ATEX, Uranium, and MSGS all of which were received well. I hope to continue to add to this repository going forward. I may also write up my Cannabis ideas, DJCO, or LPRO in the future.

I am on the search for growth names that have the opportunity to surprise to the upside. I would love to get the growth allocation up to 10-20%. Let me know if you have any bright ideas.

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Disclaimer: The information provided in this report is for general informational purposes only and should not be construed as investment advice. The author of this article is not a licensed financial advisor and does not guarantee the accuracy, completeness, or timeliness of any information presented herein. Investing in securities or other financial products involves risk, and the reader should carefully consider their own investment objectives, risk tolerance, and financial situation before making any investment decisions. The reader should also consult with a licensed financial advisor or other professional before making any investment decisions. The author of this article will not be held responsible for any losses or damages resulting from any investment decisions made based on the information presented in this article.

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The thesis is all over the web today whereas in 2020 you couldn’t find a single thing out about this market (shoutout Sachem Cove, Kopernik, Segra, Azarius, and Old West). My initial thesis was incredibly simple:

1. There is a clear shortage of uranium supply (at prices under ~$65 where projects are economically feasible) 

   1. I modeled each mine and each reactor

   2. I did a guesstimate on the secondary mobile supply

   3. There were clear issues at lower prices

2. Sentiment was at all-time lows and the sector has completely bottomed out with uranium companies once numbering 500 down to <50

   1. The sector had no research coverage, no information, and its top producers were cutting supply

   2. The sector dropped by over 50% during March 2020 despite Covid having essentially no effect on the demand for nuclear power 

3. Demand is inelastic and is not going to decrease at a fast rate if at all (buyers of fuel will pay for it regardless of price given the lack of any alternatives)

   1. Fuel buyers, like government workers, do not care what the price is, but merely that the machine stays on, unlike other commodity markets. This was the key to my thesis and what got me excited. 

   2. There is a great Tegus transcript with a fuel buyer who hands you the thesis on a silver platter by explaining he doesn't care what the price is and how it will never go up. 

   3. There is no cap to how high the price could go, and it will likely overshoot the point of economic stabilization 

4. There is nothing that can disrupt supply/demand mismatch before it causes issues which will lead to large increases in uranium prices

   1. The only possible disruption would be a major nuclear disaster of which I put odds at roughly ~1-3% per annum 

5. Pick the miners which have staying power, in understandable geographies, enjoy the leverage to the price of uranium and wait…

   1. At $65/lb uranium NXE is worth ~$6-7, CCJ is worth ~$35, etc…

   2. Ten-bagger upside potential in certain names with >50% chance of multiples of capital

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As we sit nearing the end of 2023, the thesis has obviously worked out, and then some (financial buyers, geopolitical events, demand increases, SMRs, overfeeding, etc..,) with the actual outcome surpassing my wildest expectations from initial investment. The change in sentiment is great for the world as well. 

However, the reality is today that the uranium price does not need to go higher to create economic stabilization in the U308 market. There is a ton of uranium out there, and at ~$90/lb there is enough economic supply in the long run and top mines can operate at insanely profitable levels. My initial target price for uranium to have supply = demand was $65 which moved to roughly $75 or $80 due to inflation, financing environments, etc…The fundamental aspects of my original investment thesis have largely concluded, the stocks have moved markedly higher and we are now in the trade phase.

The risk-reward has moved from insanely obvious upside with almost no downside outside of a nuclear disaster to just “okay”. I don’t like to be too scientific about things – in 2020 the uranium price had to triple, and the miners likely had leverage to that. Today the uranium price does not have to move higher, and the miners are likely pricing in long-term uranium in the ~$75-80 range in my view. I think the miners are more attractive than the physical today which is a change from the past peak miner levels in 2021.

To be clear, I think there is a good chance of multiples of upside from here, but I am not a trader, I am a fundamental investor. If you look at the valuation of certain companies, they are very accurately priced and unless you see a sustained uranium price above $100, it is likely worth taking some chips off the table. I have done so which I will explain below, but I'm maintaining some of my exposure to the “nuclear” scenario of extreme uranium price hikes due to there literally being no uranium left for a desperate utility within the next 1-2 years. I am doing so through long-term options but have now taken a significant chunk of my exposure off the table.

I still own a fair amount of NXE but have sold well over half of my position. Let's do some very quick back-of-the-envelope math. Let’s say NXE produces 20M lbs. a year (I think this is reasonably likely) and let's say it starts in 2030 (I think this is aggressive). Let’s say the average price is $80/lb. This creates $1.6B of revenues and let’s say their cost to produce is just $25/lb. (I know they think it's lower, but I am using this as an estimate of total company costs) or $500M. This gives them $1.1B of EBITDA. NXE will have to take on at least $1B of debt in my view and the current market cap is around $4B. A $5B EV to ‘30E EBITDA multiple is therefore ~4.5x. This is not that attractive, but you can probably still do pretty well assuming a normalized multiple in the high-single-digits for a best-of-breed, low-cost miner, or maybe you think it gets Cameco’s multiple. Remember mining businesses fundamentally are not good businesses and don’t deserve market multiples at stabilization. NXE or KAP are low-cost producers and as such deserve a higher multiple than other competitors. I think before Cameco’s recent acquisition, there was actually and potentially still is an outside chance that NXE would become larger than Cameco over time.

However, I think Nexgen’s costs could be higher, things could go wrong, and the mine may take longer to open. Heck, how many new uranium mines have come online in the last 15 years, not many. I think my first scenario above produces roughly a double in ~5 years which is not what I am looking for when investing in a miner that does not have a producing mine. The upside scenario of $100/lb. and 25M+ lbs. of production is still very attractive, but a lot has to keep going right. I like to bet on things not going horribly wrong. I will keep some exposure, but the days of uranium being 25% of my portfolio are gone. 

This math is pretty comparable across the junior mining competitors save one or two. I think Kazatomprom is still very attractive, but there is a clear jurisdiction risk, similarly with Global Atomic. 

Now there are a couple out there that are completely insane, but I won’t call them all out. Take a look at where Cameco’s multiple is today, and they arguably have questionable at best leverage to uranium price increases. Why anyone would own Cameco at these prices for fundamental reasons I am not sure. 

UEC is the worst in my view. Not only do they have egregious compensation practices and incredible stock dilution, but they are also remarkably overvalued. I may also have a personal bias against them for taking out UEX at a low price, but notwithstanding that does not change the valuation. There is some option value to this name, but right now UEC can mine roughly 8-9M lbs of uranium/annum if all goes well. They claim to have costs in the $30s and $40s but are buying physical uranium in the mid $40s - not sure that makes much sense if you can produce for far lower prices. 

Anyways, simple math, let's say their total cost to produce (company-wide expenses which are not small) is roughly ~$50/lb which I feel is generous and let’s say they don't dilute the bejesus out of the shareholders in the meantime. 8M lbs. of production at ~$75 uranium is revenue of $600M with costs of $400M or EBITDA of ~$200M. This equates to an insane 13x EBITDA in a very positive scenario. Why would you ever own this when you could buy DNN/NXE, etc…I don't think anyone would buy this asset given its relative valuation – if the sector got peaky, there are 5+ better assets out there for larger companies to buy. Check out this strong report by Kerrisdale - don't worry Sahm was long other miners so didn't lose his shirt on this report: https://www.kerrisdalecap.com/investments/uranium-energy-corporation-uec/.  

I realize that these analyses are incredibly simplistic, and I only keep models on a few mines today, but the back of the envelop math is just different today than it was and it’s far worse for some than it is for others.

To me if you believe in the continued supply squeeze which I do (but I am not a trader) you should play it via options (or OTM option companies like a Bannerman) to capture the potential pop as fundamentally owning these securities promises to be at a minimum more difficult and with worse risk/reward moving forward.

Let’s for example utilize Dennison. If I buy an option to own Dennison at $2 in 2 years and it costs me roughly $.50 and I believe there is a 40% chance the stock goes to $6 and a 60% chance the stock is below $2.50, if it goes to $6, I make $3.50/share on my $.50 investment, or a 7x. At 40% of the time that is a 2.8x expected value. 

If I use those same odds for owning the stock of DNN. 40% it goes to $6, 60% it goes to a $1.50 let’s say. My expected upside is just far lower owning the stock and I can buy cheaper exposure with options. I am a novice in options, but I find the ability to sell the stocks high today and maintain some minor exposure to the blow-off-the-top event relatively attractive. I think 2 years is definitely a safe time frame in which this event will either happen or not happen.

Given where the market is valued today, I don’t see a continued steady uptrend, in fact, I see the status quo or a downtrend, with a fair shot at a violent upswing. I’d like to be positioned to capture this potential upside but having this as a large percentage of my net worth on largely a trade without the support of the physical price needing to move higher to satisfy supply/demand is just not the way I choose to invest. I realize I may leave lots of money on the table, but such is life.

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Disclaimer: The information provided in this report is for general informational purposes only and should not be construed as investment advice. The author of this article is not a licensed financial advisor and does not guarantee the accuracy, completeness, or timeliness of any information presented herein. Investing in securities or other financial products involves risk, and the reader should carefully consider their own investment objectives, risk tolerance, and financial situation before making any investment decisions. The reader should also consult with a licensed financial advisor or other professional before making any investment decisions. The author of this article will not be held responsible for any losses or damages resulting from any investment decisions made based on the information presented in this article.

The theme of this article and investment is “inertia” and I will eventually get to an in-depth discussion of Madison Square Garden Sports, the owner of the Knicks and Rangers (MSGS). But first, I will go on a bit of a tangent/thought experiment that has always fascinated me and for which I have never seen, read, or heard a suitable and detailed answer: Why didn’t certain all-time basketball greats see the advantages of the 3-point shot earlier and optimize their games?

I am a huge fan of Michael Jordan and Kobe Bryant. Both players are legendary for their focus, work ethic, competitiveness, and addiction to their craft at all costs. Kobe in his book, The Mamba Mentality, writes the… "Referee has a designated slot where he is supposed to be on the floor. When they do that, it creates dead zones. I learned where those zones were, and I took advantage of them. I would get away with holds, travels, and minor violations." This quote was emblematic of their approaches – anything to get an edge. Seemingly, anything except a bit of math, breaking with the norms of the day, and focusing more on 3-pointers. 

Both players were capable of everything on the court including the 3-pointer but did not need the 3 to be all-time greats. However, shockingly (though not at the time), neither developed a consistent 3-point shot. Jordan averaged just under 33% from 3 over his career and shot just 1.7 3’s per game. Kobe shot a similar percentage and averaged just 4.1 3’s per game. Two of the top players of all time who were all-time great jump shooters did not prioritize 3-point attempts or percentages and both shot a tremendous amount of the worst shots in basketball, contested mid-range or long 2’s. See here for a great display of how the NBA shot chart has changed over time. I’ll include 2 snippets below. Note this has exponentially changed even over the last 5 years. In ‘97-’98 3-point attempts per game per team were 12.7 vs. last year at 34! Basketball Reference

Why?

We know the math says shooting 33% for a 3-point shot is equivalent to 50% on a 2-point shot (the expected value of each is 1). As an aside, in pickup basketball, for some reason (another rabbit hole with a bit more literature than the topic at hand where the consensus is around ease of doing math), the rules are usually 1’s and 2’s. In this case, 2’s become incredibly valuable, so shoot more “2”s in your local pick-up game. Back to our two subjects, I believe if Kobe or Jordan were entering the league today, they would both shoot 8+ 3’s a game at a 35%+ clip. I think they both would have been more devastating offensively, especially with the spacing available in today’s NBA. What was most amazing about both Jordan and Kobe was their ability to navigate the midrange and make incredibly difficult, contested shots in a congested offense. It is fascinating to think what Kobe/Jordan would develop into assuming they were in their early 20s today and what their games would have looked like. 

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Here is what Jordan said in 1992: 

“My three-point shooting is something I don’t want to excel at because it takes away from all phases of my game. My game is fake, drive to the hole, penetrate, dish-off, dunk. When you have that mentality of making threes, you don’t go to the hole as much. You go to the three-point line and start sitting there, waiting for someone to find you. That’s not my mentality, and I don’t want to create it because it takes away from the other parts of my game.”

Jordan here argues mainly for mentality as his reason, and I urge readers to watch Jordan making 6 3’s in one half of a finals game vs. Clyde Drexler to illustrate what he could do if he wanted to. The media was comparing the two and would consistently give the edge to Clyde as a long-range shooter. Jordan let the world know that was a choice made by him. What is even funnier about the clip is the lack of contest as the other team was shocked to see Jordan attempting that volume of 3s and frankly may have been happy he was doing so. Kobe would perhaps argue the same thing given how much he modeled his game after Jordan. He would likely also cite being a perfectionist or multi-faceted does not translate as well to a game modeled around a consistently high volume of 3-point attempts. 

Here is what all-time great shooter Ray Allen said about both players, "I think they were both underrated three-point shooters. When you think about it, if you can do one thing great or a couple of things great, some other things get overshadowed. Mike never really had to shoot threes cause he was so good inside the paint, and Kobe was so good scoring in general. If I had to say between both of them, it's hard because both of them played with their back to the basket. They both were slashers at the rim, and I just don't think their games were designed to sit out there and wait behind the three-point line.”

These are interesting takes from basketball geniuses talking about this exact topic, but I disagree with all of them. In fact, I believe in the future there will be a player who does what Jordan/Kobe did but does it from the 3-point line. We have seen flashes - Harden patented several unique 3-point shots, Curry and Lillard the 35–40 footer, but who can develop that Kobe/Jordan/Carmelo-like mid-range game from deep? Is it possible? I think Kobe or Jordan would have made a run at it if they were coming into the league today. Kobe was clearly capable of making the high level of difficulty shot from downtown: Kobe hits 3 straight difficult 3's in 2013.

Here is an absolutely fascinating article on the topic by fivethirtyeight. It details a discussion on Tracy McGrady vs. James Harden and Kevin Garnett vs Anthony Davis. It hits on long-2s and midrange jumpers and how each career would be different if you adjusted the player’s shots appropriately (i.e. moving long 2s to 3s). Interestingly, percentages on long 2s are very similar to 3-pointers which is why the shot selection of NBA teams has changed so dramatically. This is why I don’t think you’d see Kobe and Jordan’s shot percentage dip much had they worked on developing their game to get up 8+ 3’s per game. 

The best pushback, which I got from a family member, was the value of the old school “And-1” 3-point plays and getting the other team in foul trouble. Additionally, their in-game dunks would demoralize opponents. There is no doubt that free throws, getting teams in foul trouble, and “intangibles” are valuable - Jordan was a career 83.5% FT shooter at 8.2/game, while Kobe was at 83.7% at 7.4/game and both were prolific in-game dunkers. This could arguably be added to the mentality defense Jordan lists above. While this was a good retort, there are players like James Harden, who even including his years where he didn’t have as heavy of usage in Oklahoma City, for his career averages 7.6 3’s attempted/game and also a remarkable 8.6 FTA/game. Harden, to caveat, has clearly played in an era more advantageous towards the offensive player.

I find the somewhat minimal dialogue on the topic interesting, but the only real answer in my opinion is inertia. They didn’t shoot 3s because no one else did. The best players in the league were not 3-point shooters. They must have known the math, but it was just something people didn’t do. The 3 was incredibly undervalued and the players, known for doing anything to win, couldn’t overcome the societal influences. I would note that this isn’t unique to basketball, and we have seen similar transformations in baseball and football (though sports where 1 player has a more limited impact), but I still do think Kobe/Jordan could have figured this out and changed the game more quickly. 

If anyone has seen any articles or has in-depth thoughts on the above, I would love to connect or be sent any relevant pieces. I may do a larger article on the matter in the future as maybe the answer is not so simple, and I am missing some major drivers.

MSGS

Now back to regularly scheduled programming – MSGS, the reason we are here today. The Knicks have arguably been poorly run consistently for 40+ years and MSGS’s share price has mirrored the product on the floor over the last half-decade, however, the compounding of the value of the underlying asset has been tremendous over the short and long-term. 

Since MSGS became a standalone company in April of 2020, the share price has stayed the same, however, the Knicks and Rangers’ Forbes values have moved from $4.6B and $1.7B to $6.1B and $2.2B respectively, or an increase in NAV of $2B or ~$83/share.

Company Description

MSGS includes the ownership of the NY Knicks, NY Rangers, and of FAR less importance two development league teams, a sports performance center, and a noncontrolling investment into an esports and gaming franchise. MSGS trades at an EV of $4.4B vs. my predicted value of ~$10.2B in a combined sale.  The company now exists due to several spin-offs from Cable Vision to MSGS today. Additionally, while I don’t believe the business’s actual operations are critical to its value, it was nonetheless exciting to peek behind the curtain to learn about the operations of owning a sports team (my personal dream). I will go into detail on this later in the article. 

Executive Summary:

I noticed a key inflection point last year in what I believed to be a real potential for a high-profile value realization at a premium to Forbes values in the NBA (Phoenix Suns) along with other key catalysts coming closer and closer to fruition. At the time, I talked to a dozen people about MSGS, and no one cared, was interested, or even knew how the business worked which I thought was interesting given the trophy nature of these assets along with the overlap of interest b/w sports and investing. The common reason was that Dolan (the team owner) sucks, he’ll never sell, and the discount won’t close, aka inertia. I am sure I will get some comments to that end on this article. The status quo will stay the status quo. NY investors were especially bitter when the idea was brought up (I can’t blame them). I believe this perception will change and the value of the asset will become more accurately priced as various hard and soft catalysts come to fruition.

Along with what I believed to be several upcoming short and medium-term catalysts; in September/October of 2022, the shares had traded at the largest discount to NAV since MSGS became a standalone business along with multi-year lows in the stock. The stock was around $140 when I was pounding the table and it appreciated to well over ~$200 but has settled back down around $175 where I see strong value and nice asymmetry. Despite some of the IRR realized today, I still believe it's an attractive investment and am increasing my position on any dips. This is not an investment where you will get rich, but more about asymmetry and lack of correlation to my other holdings.

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The key tenets of the thesis are below:

1. Valuation and Discount to NAV: Knicks ($6.1B) and Rangers ($2.2B) are worth $8.3B combined according to Forbes estimated values. However, based on the past 5 NBA transactions relative to Forbes values. there was an average 38% premium paid which gets us to well over $10B in a potential sale assuming the Rangers trade for their Forbes values. As another data point, Sportico values the Knicks at ~$6.6B.

   1. MSGS allows an investor to buy a top 2 asset (Warriors viewed as most valuable) in the top 2 professional sports league (in the US) at roughly 50-60 cents on the dollar with a free hockey team thrown in for good measure. The math of ~$10B at sale equates to roughly ~$416/share gross of any potential tax burden.

2. Downside Protection: James Dolan repeatedly says he is not selling. If there is no sale, partial sale, etc… we would just grow with team value which has CAGR’d in the double digits over time. The discount to NAV could certainly be widened, but I view this as unlikely given the catalysts I will detail later and the current levels of the discount being at or near their widest. 

   The downside is likely an inflation plus NAV growth calculation along with a small amount of FCF over time (~1-3% or so of market cap today). I believe returns end up being around the 5-10% range over time assuming no value realization. The bond+ downside is countered with a 100%+ upside if the discount closes to Forbes figures or higher in the event of a sale at a premium.

   1. Sports teams’ values in the NBA have grown at double-digit CAGRs over the last 15 years, and for the Knicks, this has been above a 20% CAGR since 2010 with the Rangers in the low double digits. Believe it or not, the Knicks’ Forbes value in 2010 was just ~$600M, a 10x since that time. 

   2. Jerry Buss purchased the Lakers in 1979 (he also got the Kings and the Forum Arena) for $67M and assuming the Lakers are worth $6B today (no credit for Kings/Forum), the CAGR for this purchase is a remarkable ~11% and including the value of the Kings it would be a >100x if he had held both until today. This 11% is vs. the SPY at 7.75% over that same time frame. 

   3. Each team is a local monopoly within a nationwide monopoly and the Knicks and the NBA are best of breed. This is not to say this will continue, but it is nonetheless incredibly impressive and longevity begets longevity. 

3.  Catalysts: We have had a plethora of recent pricings in the marketplace which I have shown below in the table on the left. The increasing PE participation is on the right. The NBA recently in 2022 allowed ownership by pensions, university endowments, and sovereign wealth funds which will lead to further increasing liquidity and more valuation comparables.  

Other catalysts include a new media rights deal in ’24-’25 (set to in my view at least double annual revenues relative to the current deal – a double is worth ~$45M (~$2/share) in FCF/yr to MSGS), increasing PE involvement and institutional capital investment (according to Pitchbook 20 of 30 teams have a PE connection), the increasing prevalence of sports gambling and its effect on advertising revenues, two expansion teams in Vegas and Seattle (which if valued at $4.5B each leads to $300M, or $12.55/share in the pocket of each current owner), and the potential of a marquee free agent signing along with sustained team success.

Finally, James Dolan’s father is currently in his mid-90s and if he were to pass away it would perhaps trigger changes that could lead to a value realization (this situation led to a Denver Broncos sale recently). Additionally, management acknowledges the discount to NAV is too wide, and Dolan has suggested in the past that he would be amenable to a sale of the teams at the right price, and his passion clearly lies in art, entertainment, Sphere (which has recently opened) etc… Please check out this article which features quotes from Dolan like: 

“Being a professional sports owner in New York, you’re not beloved until you’re dead.” and

He doesn’t “really like owning teams.”

4. The Ultimate Rich Ego Purchase: The first 3 points of the thesis are somewhat well-known, although I believe Dolan is much more likely to sell the team than the market believes, and I think it is under-discounting the institutionalizing of the asset class. However, my thesis conviction ultimately rests upon the ego of rich men which I would say has passed the test of time. There are a limited number of ways to be the “guy” in a city and the best way is to own the sports team and create success. The Knicks are at a whole different level in this regard. There are ~130 billionaires in NY. How much would they pay (perhaps along with PE) to be the most beloved person in the city? That is a great supply and demand mismatch. I am extremely confident in this tenet of the thesis.

   1. New York is arguably the most important city in America, perhaps the world – Bezos, Cohen, any other rich person etc… would love to own this team. It is a one-of-one asset right up there with the Yankees. 

   2. The answer to me on what this is worth is “priceless.” I think Joe Lacob really helped pave the way for this, an anonymous person who became the guy in SF and is now well-known throughout the country. Imagine bringing the Knicks their first title in 50 years –- you would be a hero.

5. The Under Discussed Key – Depreciation: This investment should be classified as something akin to fine art in that its value is dependent on what rich people pay for it, its value will likely increase over time, and it isn’t going to produce (a lot of) cash flow. However, owners can depreciate the vast majority of their purchase price over 15 years. So, you get an appreciating asset, you get to be the “guy” and a giant tax deduction (something very appealing for hedge funds or PE magnates). This treatment has in my opinion been the #1 or #2 reason for continual increases in sports teams’ values and is also discussed less than the first 3 points of the thesis. 

The rest of the article will largely discuss the business operations that are not as important to the value of the business as what I covered above. At the end, I will walk through the risks to the thesis and my pushbacks.

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Revenues (FYE is June)

Revenues are split between games/event-related at ~41% (tickets, suites, merchandise, food, and beverage), TV rights (national and local) at ~34%, advertising/sponsorship at ~22%, and “other” as the remainder. In 2022 the first non-Covid-effected period as a standalone company, MSGS generated $820M and $115M in adjusted operating income (adds back minimal D&A and egregious $25M of SBC, however, it does not include the difference b/w cash expense and GAAP lease expense paid for the Garden which is around ~$25M making the adjusted figure roughly accurate in my view). As a result, cash flow was roughly ~$25M higher than operating income last year. 

Playoffs are huge generators of operating income with each additional game often generating $3M+ of operating income and $6M+ of revenues. There is positive optionality when both teams make deep playoff runs for business operations. Revenue increased further in 2023 to $887M with a similar amount of operating income (business was not very efficient growing expenses just as much as revenues in dollars not percentages). It is important to note that MSGE and MSGS were combined and financially intertwined through 2020 thus making longer-term financial analysis difficult, so I believe these two periods are likely the best avenues for forecasting future performance.

Tickets and Concessions ($363M): The team sells tickets, merchandise, and concessions to fans. Season ticket churn rates are in the single digits (the combined renewal rate of Knicks/Rangers was 93% in 2023) so this revenue is in essence almost fully recurring. Tickets are the largest revenue line item and MSGS keeps 100% of the proceeds. Concessions/merchandise have a different revenue model, but regarding tickets, there are roughly 41 regular season games per year per team along with a couple of preseason games and depending on team success a couple or a dozen or so playoff games. The company does not provide breakouts b/w tickets, concessions and merchandise, but concessions/merchandise are typically viewed as a percentage of revenue. The average Knicks ticket is around $150-$200, and you can expect concessions/merchandise to be anywhere from 15-35% of that price. Playoff games essentially have increased ticket prices by 50%+.

None of the details are disclosed, so the following are my educated guesses - I will not make this writeup longer by showing the actual model, but instead will just walk through a brief unit economics exercise. ~19.5k fans, ~$160/seat equates to ~$3.1M/game in tickets. Assuming 44 games including preseason, we get ~$137M in tickets. Add 25% of ~$137M to get to tickets + concessions/merchandise revenues at ~$171.5M. Assuming Rangers tickets are ~$125/game we get to ~$110M, adding concessions/merchandise in gets you to ~$137.5M. The two combined get you ~$309M. This gives the remainder of ~$54M. Playoffs will generally add or subtract from the above and the above can vary and my assumptions could be wrong as to the makeup. In 2023, there were 8 playoff games which led to around ~$54M of additional revenues which is right around the company’s estimate of ~$6-7M/playoff game. 

MSGS keeps 50% of the profits for concessions (splitting it with MSGE) and has a 30% royalty on all merchandise paid to MSGE. 

TV Rights and Media ($289M): The company earns recurring revenue through both national and local contracts. The current national media rights revenues are around $110-120M for both teams combined with the NBA making up the vast majority. I calculate the NBA contract value based on roughly $2.6B/annum over 30 teams = roughly $85M/team which many experts expect to double in ‘24/25. The last deal prior to the most recent NBA deal was <$1B/yr. The NHL contract is $250M/season or roughly $9M/team, but there are sub-contracts within that which get the total figure higher. The NHL recently struck a deal in 2021 with ESPN at over $400M/season or ~$13M/team. There are also some radio revenues in here and other small line items.

Local TV networks are a major line item for the Knicks and not so much for other teams (the Suns new owner decided to just take a 0 here and show all games for free). The Knicks will make over $170M from local TV and this deal increases at 4% per annum and ends in 2035.

Both local and national are recurring revenues which are essentially all margin to the team and come with limited incremental costs (note the league-wide TV deals do affect salary caps).  

Advertising ($196M): The company generates its advertising revenue via signage, sponsors, and suite licenses at Madison Square Garden of which sports gambling has become their largest single industry advertising group. The Knicks recently began selling a spot on the jersey for which they are now targeting $30M/season. As mentioned, suites are also in this category and the Garden has roughly 110, but pricing is not disclosed. However, MSGS is entitled to roughly 34% of all suite revenues while the rest goes to MSGE. I was not able to understand the detailed split in this category. In theory, this revenue is likely less recurring, but suites also have low churn and advertising revenue has been increasing as a result of the sports gambling effect – this segment was up $24M YoY.

Other (Company/Street assumes ~$40M): This other section consists primarily (I think) of the Knicks’ share on a variety of league distributions including royalties, trademarks, playoff revenue rebates, and luxury tax rebates distributed by teams over the luxury tax. This is the segment I have the least handle on, and I believe it could fluctuate wildly, especially with regard to the luxury tax. There are also new salary cap rules coming which could affect this line item.

Expenses: 

The company has many different expenses which are very difficult to categorize. In 2023 there was $548M of total direct operating expenses and $250M of SG&A for a total of $798M. The main direct expenses consist of course players and personnel salaries. The Knicks payroll (players) alone is ~$170M for the upcoming season while the Rangers is roughly ~$80M for a combined ~$250M. 

Coaching, game-day expenses, and other staff are likely material. For instance, head coach Tom Thibedeau makes $8M/yr. Let's say combined team-related staffing is ~$60M. On the income statement, the lease expense is ~$67M, but the cash expense is around $40M. Adding up team-related staffing, income statement lease expenses, and player expenses we get to $377M. 

Other direct costs paid to MSGE are $33M in addition to the lease expense which gets us to $410M. The remainder of direct expenses is other costs outside of salaries including travel, insurance, league revenue sharing (~$50M+), league tax of 6% on ticket sales, various other taxes, game-day operations such as cost of merchandise, training center, D-League operations, and more. I still am not sure how to get to $548M, but the majority is explained. 

SG&A of $250M consists mainly of corporate staff as well as fees that MSGS pays to MSGE for advertising, back office, and more, as well as additional advertising and marketing costs. Roughly $60M of costs in this category go to MSGE. Company executives and SBC are also included in this category. However, I have no idea how this gets to $250M. I believe there is A LOT of fat to cut here for a potential acquirer. There are many unexplained costs, and this company again is NOT run for cash flow or for efficiency. 

Margins and Cash Flow

As far as margin, there is not a full swath of data across teams and leagues. There is an interesting website, of which I do not know the efficacy of, called runrepeat.com which shows the Knicks among the best of breed as far as average margins go across the league with most of the league operating right around breakeven. However, the cost structure is quite bloated and much more expensive than other teams. There is a clear opportunity for improvement under a different owner to improve margins and in turn cash flow. 

It is difficult to look at historic periods and find a reliable estimate of cash flow over time. However, the business does generate cash flow. Estimates from the street tend to center around ~$100M or so per year without the benefits of expected media contract increases, sports gambling upside, and playoff potential. There is limited capex, so the business can buy back shares or pay special dividends from this cash flow which the company did last year - a $175M special dividend and a $75M buyback. I believe this can/will continue especially with the discount to NAV continuing to stay wide. Hopefully, it is more buybacks than dividends given the share price. Assuming around $125M conservatively of cash flow post-media deal, and a current market cap today of ~$4.2B, we have a relatively unexciting yield of ~3%, but a yield nonetheless. 

Industry:

The NBA has ascended since its founding in 1946 and this has accelerated due to the increasing penetration of TV/media deals, international growth, sports gambling expansion, and the newer amortization and tax benefits. The NBA had many tough periods, but for the most part, has seen sustained success since the Magic/Bird and David Stren era. From 1998-2022, according to Forbes, NBA team values CAGR’d at an incredible ~12%. The NBA’s revenues have CAGR’d at lower levels but still are estimated to have grown in the high-single-digits over the last 20 years and at around 10% over the last decade. The NHL also has seen strong growth – according to Statista, the NHL has had revenue increases of around 6% over the last decade. 

The Knicks' valuation over the last decade has actually grown at 23% per annum with the Rangers at 11%. Using 2012 as the base year the Knicks’ value was $780M and the Rangers’ $750M vs. today $6.1B and $2.2B respectively. 

I believe the top sports leagues are monopolies in nature, though this has come under fire lately with the Saudis throwing billions of dollars around. I don’t believe they will come after the NBA/NHL, but it is a minor risk. The teams within the league are local monopolies. I find the threat of new entry to be extremely low for the Knicks/Rangers. We saw how little the Brooklyn Nets affected the Knicks despite the superior talent and investment. 

As far as cyclicality goes, it is difficult to tell, but I would guess team values would be somewhat cyclical despite the lack of cyclicality from the underlying business due to contracted TV/streaming as well as minor declines in stadium revenue during financial recessions. As a data point, NBA revenues were roughly flat from 2008-2010. 

Moat and Differentiation

The Knicks and Rangers are best-of-breed assets in their respective leagues accordingly placing in the top 2 in value for the NBA and the top in the NHL according to Forbes. While the Rangers franchise has been somewhat successful the Knicks hold this value despite what can only be described as nearing 50 years of misery, mismanagement, and heartbreak. There are only 9 cities in the US with 1M people, none of which have the wealth and rabid fan base of NY outside of maybe LA/SF. They also play in the most famous arena in sports with higher local TV revenue than any other team. 

NY itself has some downside in that it has extremely high taxes and the history of mismanagement has perhaps lessened the appeal for free agents. The teams compete with other sports leagues/teams and any other form of entertainment for attention, ad dollars, etc… but I am comfortable betting on the durability of live sports. The Knicks/Rangers, much like Disney, create new customers each year when Knicks/Rangers adults have children. This loyalty and commitment to sports teams is as American as it gets. 

The Knicks/Rangers have strong leverage over their customers (fans, advertisers) and this is shown by unwavering support despite the Knicks record and questionable owner and front-office decisions. Knick fans are excited just to have hope or a team who shows effort. They really love their current team despite not having a real shot at winning a title. I believe the Knicks franchise has turned a real corner and the inertia over the last 40+ years is dissipating. I wouldn’t be surprised to see sustained success in NY which could also help the valuation.

One of the reasons I was initially attracted to this investment was in fact the strong team I saw heading into 2022 who I thought would definitely make the playoffs and could maybe win a round. That is what happened and I do think this helps the underlying value even though the actual cash generation value is immaterial. However, when an organization shows competence, competitiveness, and talent, you can attract the star that Knick fans have been craving. I believe there is a really strong possibility a star will go to NY over the next couple of years. 

Due to the shifting landscape in TV and streaming, live sports are the last appointment TV viewing we still have remaining in the US. The NBA/NHL are becoming more valuable to advertisers for that reason. The NFL has the highest advertising rates globally. Live sports are increasing in value (and are the key) to the cable bundle. There is also a plethora of new potential bidders for rights with Amazon, Apple, Google, etc… potentially involved in the future revenue streams of the league.

Interestingly leverage vs. suppliers or in this case players and coaches is quite low. The “player empowerment” era is upon us catalyzed by Lebron James’ Decision to go to Miami earlier in the last decade. Players routinely ask for trades, demand whatever they want, and often get just that. Additionally, as discussed earlier, you have a history of poor performance for the Knicks as well as higher state taxes working against you. On the other hand, you have a lot of off-the-court opportunities for players in the city. 

Depreciation and Tax Laws: 

The most under-appreciated variable in the rise of the value of sports teams is the ability to depreciate most of the purchase price of a team. According to many sources, including Propublica (read this article its really good), teams in 2004 were now able to utilize amortization when purchasing a team, unsurprisingly signed by President George W Bush, who himself was a part owner of the Texas Rangers. The estimates for write-offs of purchase value ranged from roughly 50-90% from what I was able to hunt down. The article linked above discusses David Tepper who purchased the Carolina Panthers for $2.3B. The article estimates the taxable offset could be around $140M/yr. Despite the ability to amortize the purchase, we know the “depreciation” of assets isn’t real in sports like in a manufacturing company. Sports teams in the NBA in actuality are closer to fine art or land and there is no capex. This is a meaningful tax shelter for rich owners. Additionally, minority owners think PE funds or other HNW individuals, could also benefit. 

From the above article, “Bob Piccinini was a minority member of the group that purchased the Golden State Warriors in 2010. He made his fortune turning Modesto-based Save Mart Supermarkets into the largest family-owned grocery chain in California. Already a part owner of multiple baseball teams, he entered the basketball world not because he had a particularly keen interest in the sport, but to make money. “Sports franchises continue to go up in value,” Piccinini said at the time.

His tax information shows he bought more than 7% of the Warriors. From 2011 to 2014, he reported total losses of $16 million. Nearly a decade’s worth of tax data from other Warriors owners, also reviewed by ProPublica, showed many millions in losses — all of it during a period when the team rose to become historically dominant. Meanwhile, leaked financials obtained by ESPN from 2017 show the Warriors to be an extremely profitable business, netting $92 million in one season alone. Forbes estimates also put the team well in the black during that period. A Warriors spokesperson declined to answer a series of specific questions, instead providing a one-sentence statement: “Over the course of the last decade, we have invested hundreds of millions of dollars into our team on the court, our overall operation and, of course, the construction and opening of a new, 100 percent privately financed arena in San Francisco. Piccinini died in 2015. The court records about the inheritance he left his children don’t specifically mention his stake in the team or whether his estate paid taxes following his death. But the tax code likely would have allowed his children never to repay the government for the paper losses their father enjoyed. It would also have permitted Piccinni’s heirs to begin claiming paper losses of their own.”

There are other great examples such as Steve Balmer’s purchase of the Clippers featured in the article. A big risk is this policy changing, but rich people rarely lose tax loopholes. This “loophole” massively reduced the true cost of buying a sports team.

Balance Sheet

The company has ~$325M of debt which is not a concern given the team value. The league has leverage limits for all teams and is one of the primary reasons the business was separated from MSGE. There are some unusual assets/liabilities on the balance sheet that are interesting to understand, but ultimately not material to our discussion today. 

Management

Despite this being the biggest reason the stock trades at a discount to NAV, the Dolans have done quite well over the long-term, mainly James Dolan’s father, outperforming the SPY meaningfully over time at predecessor entities. We are well-aligned with James Dolan in that he owns 20% of the equity. The Dolan family has managed MSGS for decades and James Dolan in particular is criticized as a terrible owner. James pays himself as well as other executives quite generously. 

The compensation goals for the business are strong with the vast majority of pay at risk and longer-term for top executives, although SBC is clearly too high. Despite the lack of team success, the value of the assets has moved up significantly and ahead of peers. The team generates FCF which is unique in the league. I do think there could be a lot of expense reduction if the team was run more efficiently, but again it is not really an important determinant in the value to a new owner. 

As Buffet stated, “They say in the stock market, ‘Buy into a business that’s doing so well an idiot could run it, because sooner or later, one will,” I believe that is the case here – good management may help, but as far as the stock and value goes there really is not a lot of people that could screw this up, including the Dolans. 

Opportunity/Conclusion: 

As mentioned above this is an opportunity to own one-of-a-kind, monopoly assets at a significant discount to intrinsic value. The hypothetical return or IRR is based upon team value growth (historically double digits), FCF roughly 0-3% of market cap per annum but step-function increase in 2 years with potential for more upon league expansion, and discount to NAV Closure (would take roughly 100% return to get to Forbes values which are generally below actual sales values). I think a downside case is NAV growth matches inflation (2-4%), FCF at 1%, and discount to NAV never closes while an upside scenario would imply HSD NAV growth (7-9%), FCF at 3%, and discount to NAV closes in 5 years (100% upside in 5 years). 

Valuation:

The cost basis of the purchase is quite low, so I utilize a blended 19% tax rate and assume there is no tax shield available to shareholders at exit. My guess is that in actuality you could more eloquently structure a transaction to have a higher exit value.

Key Risks

• Dolan discount/never sells/screws over shareholders somehow upon sale.

  • We are minority shareholders and thus decisions can be made by Dolan without our consent. This is the largest risk.

  • Pushbacks: 

  • Discount/Never Sell - I believe there is an increasing likelihood of a partial sale, total sale, etc… which is not priced into the market and will close the discount. Given the level of the discount, even if over 10 years (roughly 7% CAGR), it is meaningful to IRR. 

  • Screws over Shareholders: I have spoken with some bankers, lawyers, and investors and there does not seem to be any reasonable way to screw over minorities in the event of a sale. There are some intelligent value investors among the top shareholders in the company which would put up a battle if this were to occur. Dolan has other public entities that would also suffer.

    • Not selling the Knicks in the past has clearly been a great move. 

    • Over the long run the Dolan’s have outperformed the SPY. Cablevision went public in 1986 and sold in 2016: +3600% vs. SPY 1900%. 

    • As mentioned above, the assets are so good, that they overcome poor mgmt.

• Value Trap and the business doesn’t earn much money.

  • Sports teams could be at their peak, and the discount to NAV can always widen. Ben Thompson of Stratechery has some solid points on the future of the NBA being in doubt, mainly as a result of the failing cable bundle and younger audiences no longer watching entire games. 

  • Pushback: I continue to see NAV growth (albeit at lower levels) and catalysts upcoming which will close the discount. These catalysts are not appreciated by the market and I see downside protection due to the large discount to my view of NAV. The company does return capital as evidenced by a $250M return of capital in 2022. I think Ben Thompson has good points, I just think the value of live sports is evident and will increase in value. Monetization of the product, while important to the league, may not impact teams’ values as these assets do not trade on FCF or any earnings metric.

• Saudi/New League risk

  • The NBA could be disrupted by large offers to top players. There could be a competing league. 

  • Pushback: I don’t believe there is a real risk here.

• Lack of potential buyers given the cost of the asset

  • Pushback: I don’t view this as credible, but given the price tag there is a limited list of potential buyers

• Other options – Braves (Liberty), MANU, etc… may be better ways to own professional sports teams.

  • Pushback – I want to own best of breed both in terms of sports league and team within that sports league. NYK is the top NBA asset in my opinion. The Braves are not a top asset in baseball which is a declining league in my view. I don’t know as much about soccer, so MANU doesn’t interest me as much. I am open to other ideas, but in my view, the Knicks are only rivaled by the Yankees, Lakers, Cowboys, and a few others in American sports and are available at a large discount.

Disclaimer: The information provided in this report is for general informational purposes only and should not be construed as investment advice. The author of this article is not a licensed financial advisor and does not guarantee the accuracy, completeness, or timeliness of any information presented herein. Investing in securities or other financial products involves risk, and the reader should carefully consider their own investment objectives, risk tolerance, and financial situation before making any investment decisions. The reader should also consult with a licensed financial advisor or other professional before making any investment decisions. The author of this article will not be held responsible for any losses or damages resulting from any investment decisions made based on the information presented in this article.

Company Statistics

Executive Summary

Anterix (ATEX) is the largest owner of 900-MHz spectrum (please don’t stop reading, I know spectrum has not been a fun experience for many), which allows for wireless communication. 900-MHz spectrum has low frequencies and density but can cover large areas. This is incredibly valuable to utilities who need to own their spectrum for security, reliability, flexibility, and sometimes compliance purposes (ATEX’s end customer).

Share

Shares today imply just ~$.34 MHz/Pop, which is less than the company was trading at before it received FCC approval a few years ago to execute this spectrum transition and much less than ATEX has priced its spectrum (all 5 contracts above $1 MHz/Pop) in various signed contracts or comparable market transactions. The business is uncorrelated with the general market and has a great balance sheet. It will likely have contracted proceeds over just the next 2-3 years worth significantly more than the current EV with multiples of upside. I believe the company is worth approximately 2.5x its current share price with limited downside over a 3-5 year time frame.

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Originally, the company anticipated leasing their spectrum on an annual basis over 20-40 years. However, the situation unfolded differently, and they are now selling their spectrum outright or receiving upfront payments for the entire duration of a standard lease, but on similar terms. See below from the company’s investor presentation.

This raises the likelihood of shareholders experiencing special dividends and stock buybacks in the near term, although these outcomes may be less predictable and more irregular compared to the conventional leasing approach. As a result, the company's profile at maturity differs from high-multiple tower companies, despite the expectation of indefinite renewals for the 20-40-year contracts. While I look at MHz/Pop, others could put a multiple on the normalized cash flows. This new model is a positive for me who is comfortable with lumpy volatility, but a negative for the share price in the shorter term as most investors like steady, predictable, and growing cash flow.

Background

ATEX has over 50% of the total 900 MHz spectrum that the FCC has cleared. It acquired these rights from Sprint in 2014 for roughly $100M. It was able to be purchased at this level because ATEX had to petition the FTC to approve the spectrum’s reallocation and spend over $100M in capex over time to properly provide the current spectrum to their customers. ATEX became the de facto exclusive provider of this spectrum because of the approval granted 6 years later in 2020.

With the evolution of electricity delivery to end consumers, numerous vulnerable points of failure have emerged for utilities, necessitating the adoption of private wireless connectivity as the primary solution. Low-band wireless, known for its extended range and resilience against obstacles like buildings, has become the preferred choice. Utilities need and will pay for spectrum and are unlikely to buy it themselves given the level of cost required. ATEX’s spectrum fills this need perfectly. See Appendix for ATEX’s description of their value proposition

Why is ATEX mispriced?

I believe the poor share price performance is largely the result of management missing expectations, short-term oriented markets, and concentrated ownership rather than a change in the intrinsic value of the asset. Bears would correctly argue that management has set high expectations of leases and contracted value and repeatedly failed to execute. Bulls and management would argue that utilities move at a slow pace which they underestimated. I have worked for companies like these utilities and they are anything but efficient, so this slow pace to do something new and semi-innovative does not surprise me one iota. To me, this is more of a when, not if, story.

The big question is whether or not the ATEX story has fundamentally changed – will there no longer be demand for private spectrum from utilities? Is there real competition? Can management execute any deals? I would argue that the answers to all these questions are positive for ATEX.

How do we know there is demand for the project and management can sign deals?

• Known customer universe: Majority of potential customers engaged by management who have subsequently indicated their interest.

• Confidence in contracting: Despite revised expectations, management has shown high confidence in securing significant contracting opportunities, exceeding $2 billion, in the past.

• Signed contracts: The company has already secured five contracts, providing tangible evidence of existing demand.

• Grid modernization and digital transformation: Nationwide efforts to modernize the grid and adapt to digital advancements create a pressing need for utilities to have flexible and controlled communication systems.

• Addressing cyber threats: The rising prevalence of public cyber threats further underscores the importance of utilities having autonomy over their communications.

• Favorable customer dynamics: Utilities can invest in this spectrum with confidence, as they earn a predetermined return on their investments, and pricing concerns are minimal.

• Lack of credible competition: Besides continuing to go with the status quo, as far as I know, there are no other similar competitive offerings for this service.

Management

The management team of ATEX initially (Brian McAuley and Morgan O’Brien) were former Nextel managers/founders. Nextel's utilized 800-MHz Specialized Mobile Radio band pioneered a "walkie-talkie" feature in addition to direct-dialed voice calls. Nextel was one of the first providers in the United States to offer a national digital cellular coverage footprint. Nextel merged with Sprint when it was valued at a $36B valuation in 2005. The ATEX team has very relevant experience and has had past success.

Compensation has been egregious relative to company performance and management’s performance against its own goals. Luckily, Owl Creek, the largest shareholder has recently (Feb ’23) had their founder join the company’s board. I suspect that a better focus and more aligned compensation will occur moving forward. I think G&A is also too high, and this will be corrected in the coming years. I think this is an important catalyst for near-term value creation.

Valuation

The valuation can be done in a couple of ways. I focus on MHz/Pop model just for ease of use. You can also build out a DCF, but I find that difficult in a company with this level of cash flow uncertainty. In my sensitivity table below, it is very difficult to obtain a value below current share prices. The level of upside in the base case is large, and even if this takes 5 years to occur, my IRR is >20% which is attractive for an uncorrelated asset with little downside.

Appendix:

ATEX on the business opportunity from their recent 10-K.

We have currently identified utility and critical infrastructure enterprises as the primary customers for our current and future broadband spectrum assets. We have identified the electric utility industry as our initial focused customer group. We believe that security, priority access, latency, redundancy, private ownership, control, and unique coverage requirements are just some of the reasons utility and critical infrastructure enterprises would be interested in obtaining rights to deploy private wireless broadband networks, technologies and solutions that can be enabled through use of our licensed spectrum.

The electric utility industry is undergoing a fundamental transformation. Grid modernization efforts and the drive to reduce carbon emissions have disrupted the need for utilities to build new large-scale, centralized facilities. Today, power is generated by smaller, more geographically distributed facilities that can switch from a power producer to a recipient of power generated by a variety of other disparate sources, including wind and solar installations. Grid architecture must now accommodate end-users that are both generators and consumers, converting back and forth rapidly and carrying power in both directions, something the existing grid was not originally designed to handle. Technological advancements have produced sensors and smart devices to enable the new two-way grid and offer operators the ability to control and run the grid efficiently, safely, and reliably. Wireless communication networks, technologies, and solutions can help utilities move the large volumes of data generated by these sensors and smart devices to their control systems for decision making, analytics and responsiveness to market demand and emergencies. The legacy communications systems utilized by many utilities have increasing interference and/or higher cyber threats, are not designed to handle this new data load, are inefficient and costly to maintain, and, in many cases, have associated equipment that is approaching end of life.

Our targeted customers have historically built, maintained and operated communication networks, including private Land Mobile Radio (“LMR”) networks and supervisory control and data acquisition (“SCADA”) networks on narrowband frequencies licensed exclusively to them by the FCC. Based on our discussions with these targeted customers, these entities commonly express their desire to retain the positive elements of their aging LMR and SCADA networks, namely private ownership, tight control and custom features (such as specialized coverage and priority access), while adding the benefits of broadband and other advanced technologies (such as solving a broader set of use cases, including high-speed data transmission, video services and economies of scale). However, due to the general unavailability of low band spectrum (i.e., below 1 GHz), these entities have had limited opportunities to license or acquire the spectrum required to deploy cost-effective wireless broadband or other advanced technologies.

In contrast to legacy systems, the wireless broadband networks, technologies and solutions that can be deployed utilizing our spectrum assets can address the communication demands of the modern grid, both now and in the future. Our licensed 900 MHz Broadband Spectrum offers the assurance of absolute control over access to and use of that spectrum, allowing our spectrum to be utilized to provide customers with guaranteed levels of service and the ability for customers to prescribe and enforce purpose-built “rules of the road” for the provision of those services. Our spectrum assets can also serve as the foundational element to allow customers to implement LTE capabilities and evolve to 5G when there is a need. Recent FCC actions, including various auctions, have created significant opportunities for blocks of shared, unlicensed spectrum and/or licensed spectrum in the mid and high spectrum bands. The additional shared, unlicensed spectrum and/or licensed spectrum can enable future 5G networks, technologies and solutions. While we intend to build our existing and future business strategies around our 900 MHz licensed spectrum, the ability for our critical infrastructure and enterprise customers to combine our licensed 900 MHz spectrum with additional spectrum in one or more licensed, shared and/or unlicensed bands can provide them with an advantageous solution.

Disclaimer: The information provided in this report is for general informational purposes only and should not be construed as investment advice. The author of this article is not a licensed financial advisor and does not guarantee the accuracy, completeness, or timeliness of any information presented herein. Investing in securities or other financial products involves risk, and the reader should carefully consider their own investment objectives, risk tolerance, and financial situation before making any investment decisions. The reader should also consult with a licensed financial advisor or other professional before making any investment decisions. The author of this article will not be held responsible for any losses or damages resulting from any investment decisions made based on the information presented in this article.

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Company Statistics

Executive Summary

U-Haul’s business, quality, and management are underestimated by the market. U-Haul (formerly Amerco) is the dominant do-it-yourself-moving (truck rental) and a top self-storage company established in the 1940s by Joe Shoen’s (current CEO) father. As of the latest report, the company has 189,000 trucks, 128,000 trailers, 46,000 towing devices ~22,000 independent dealers, ~2,200 owned stores, and 55M rentable sq. ft of storage.

I value the moving business at ~$42 per share and the storage business at ~$51 per share in a conservative base case scenario vs the current blended share price of $54.70. Taking the total net debt out gives me a value of ~$77 in my base case or ~41% upside. I also believe my bull case has a higher chance to occur than the bear case which you will see in the sum of the parts model later.

The company has strong, honest, experienced, and aligned management (family and employees own >50% of shares and have voting control) which has handily outperformed the market over time. Management thinks extremely long-term, resists the Wall St imperative, and has a strong capital allocation philosophy.

UHAL is the only game in town when it comes to the rental truck business in DIY moving and I believe has a greater than 60% market share. They have created a wide moat due to their network effect and brand in what should be a commodity offering. This business’s moat and cash flow have allowed them to expand into self-storage at attractive return levels. They have unique advantages in storage due to their moving business, and storage is a great cash-flowing business already. As storage growth continues, the overall business becomes higher margin, less capital intensive, and less cyclical over time. These characteristics typically result in multiple expansions especially given the increasing share liquidity and new potential sell-side coverage.

I believe there is an advantage in this name to doing the work and understanding the business. The company has financials with a lack of important disclosures (mainly the separation of moving and storage margins, but also not breaking out large expense line items), does not placate wall street, has low liquidity, no sell-side coverage, and is facing some shorter-term cyclical and comparable-related headwinds. There are no direct peers with both moving and storage, and there is no actual free cash flow returning to shareholders as it is usually spent on storage and increasing fleet. Given the above, in order to invest, you must think long-term, trust management, and be okay with large swings in reported metrics each period that you may not be able to perfectly model or explain. This takes out the vast majority of investors who are either focused on the short-term, have liquidity constraints, need management access, or need to accurately forecast the business on a micro level.

The company describes its own investment thesis far more succinctly than I do (and I agree with all below):

1.      The leader in DIY moving and storage markets.

a.      Most diverse product offering.

b.      Largest fleet of rental equipment.

c.      Ubiquitous brand name recognition.

d.      Unmatched network of moving locations throughout North America.

2.      Significant financial strength

a.      Capex – ample opportunities to invest in growth.

b.      Cash – conservative balance sheet to fund reinvestment.

c.      Debt – manageable maturity schedule.

3.      Long-term focus

a.      Significant Shoen family ownership.

b.      Managed to maximize long-term value.

The shares have pulled back from highs and are at an attractive discount to intrinsic value. Since I originally purchased shares (roughly around ~$45), management has made a few near-term value-enhancing moves:

1) A stock split to create liquidity in the shares as well as pay a consistent dividend to UHAL.B holders. I believe the lack of liquidity is the main reason this is not a more widely owned name. These new shares are non-voting, but the enterprise has always been family-controlled, so in essence, nothing has changed here. They do trade at a wide discount, which I don’t believe is warranted.

2) Changed the company name from Amerco to U-Haul. This is more symbolic but incrementally helpful to new investors or analysts discovering the business.

3) A desire to onboard sell-side coverage and be somewhat more interested in telling their story to the market. I believe this can be a very big deal in the short term.

Although these moves are not very important to the business's longer-term intrinsic value, they offer some potential shorter-term upside to the share price. Let’s get into each business.

Moving Business (Left: 2022 Investor Webcast chart showing strong revenue growth (10-yr CAGR ending ’21 was 5.3% - FYE is March), Right: my estimates of moving margins – inclusive of products/services/Ubox)

How it works

Based on personal experience, the process of renting a U-Haul truck is very simple. It costs around $19.95 flat to rent the truck, and you pay per mile for usage after. Additionally, they walk you through a series of ancillary products you can purchase (boxes, dolly, insurance, free storage for a month, etc…).

Many moves are within the same city and customers often pick up and drop off the truck at the same location. One-way moves are lucrative and UHAL does even better here given its network of locations.

Overall, revenue per transaction, (includes all DIY/moving/other revenues) as you can see below, has historically been around ~$150 but has moved up to around $200. UHAL has not increased pricing for a long time, but they generate significant operating leverage on increased pricing. I believe that recent price increases will not revert meaningfully, which should allow for higher normalized margins. I believe they have pricing power, but the company has always been focused on offering the lowest costs. The CEO has confirmed pricing increases will stay on recent calls. Please note the below are my estimates and not disclosed by the company and may differ significantly from actual figures.

Moat

UHAL has roughly 10x the number of trucks and 20x the number of locations as their nearest peers (Budget, Penske, Ryder). This network effect is the crux of the moat as the number of locations and trucks directly correlates with customer convenience, price, and overall experience. The best convenience, price, and experience attract the most customers which attract more franchisee locations and so on. UHAL has one of the wider moats I have ever seen in their moving business.  

UHAL’s name recognition and Google-like association with moving is a large barrier to entry. The company spends essentially nothing on traditional advertising yet has incredibly high unaided name recognition.  Advertising expenses were $13.7 million, $18.0 million, and $13.7 million in fiscal 2022, 2021, and 2020, respectively. This expense is relative to an almost $6B total topline number in the TTM. This ubiquity and lack of spend enhance the moat as anyone who wishes to compete must provide a better product AND spend more to bring in customers as they are pre-programmed to go to U-Haul. A recent VIC article showed the magnitude of this advantage vs peers and Google trends is another easy way to verify this advantage.

Finally, UHAL is not making obscene margins despite all their advantages, so the competitor trying to replicate what they have does not have an easy or extremely attractive market to enter. Depending on how you calculate it (I use a FCF less maintenance capex approach in the numerator), I believe ROIC is roughly 10% over time. Moving is a capital-intensive business. Buffett mentioned investing in companies he would never want to compete with – UHAL certainly qualifies.

To better internalize the moat in moving, let’s do a thought experiment on barriers to entry:

1) Is it even possible to replicate the network base of UHAL? Maybe, but how long would it take to sign up ~22k dealer sites throughout the country and 2.2k of your own locations and what would it cost? You would have to pay current dealers more money. To give you a sense of this scale, according to Wikipedia, there are currently ~3k Chipotles, ~11k Dunkin Donuts, and ~36k Subways. On top of that, how much does it cost to create a brand like UHAL? It has taken UHAL 70+ years and billions of dollars to get to where it is today.

2) They currently own 189k trucks – these are expensive trucks, 128k trailers, and 46k towing devices. Other costs include logistics, technology, retail workers, etc… These costs are not one-time and require significant maintenance capex and opex.

3) Most importantly, and as mentioned above, even if one did this, there is not a ton of profit margin available. No one in their right mind is going to compete here. This is likely why their peers have backed off, why they have faced minimal disruption, and why they have continued to gain market share.

Other smaller areas of advantages are their technology (pick-up and drop-off on mobile) as well as the financing strategy to grow their fleet with very low cost of funds which are not available to peers. A quick example of technological advantage is U-Haul’s app having 215k reviews while Penske has just 27 (27 total not 27k).

The only legitimate threat worth pointing out is autonomous trucking, but in my view, this is well outside the time horizon of the long-term investor, and even still, I think UHAL would evolve to become a player. I doubt someone in autonomous vehicles is salivating at getting into the personal moving market with a $200 average transaction price. AVs are likely more of a threat to the Ubox business as opposed to the traditional moving business. The other threat is Ubox self-cannibalizing the moving business which I think is possible for long one-way moves, but ultimately, the product and PODS have been around for a while and have not had any visible impact on the business.

Moving Industry

There is limited information, but using various sources, the total moving market is anywhere from $15-$20B and is thought to grow in the low single digits. The TAM is still majority professional movers (based upon UHAL’s revenues/market share vs TAM). Drivers of industry growth include population growth, moving rates, renting vs owning rates, interest rates, inflation, and more. However, the company supplies images below showing the moving rate has plummeted over time, yet UHAL’s transactions continue to increase.

Importantly, this industry will always exist in some form as people don’t move very often (but will always need to move for a variety of different reasons), and are thus unlikely to purchase their own truck, which means renting will always be the more sensical economic option. I like to bet on things not changing vs things changing. UHAL strives to increase its edge over time in providing a service people will always need where there are minimal comparable alternatives.

1.  Market share – UHAL has and will continue to gain share from both of their main competitors:

   1.  A generous friend with a truck/van

      1. UHAL continues making the experience better for the customer with technological advancements, convenience, and affordability. It is becoming harder to justify to your friend with a truck that their time/effort saves you enough money/time relative to a U-Haul. For a simple in-town move, UHAL can be less than $75.

      2. The friend is only a competitor for small, short distance moves as friends typically don’t have the size of vehicles offered by UHAL. These are also the least valuable moves for UHAL.

   2.   More expensive professional moving services

      1. UHAL is far cheaper and offers the largest network of movers to their customers to provide a similar service as other professional moving services for lower costs.

      2. There will likely always be some high-end portion of the market that UHAL won’t capture, and I think they are okay with that.

   3. Their peer competition is weak with both Penske and Budget spending less on DIY trucking than they have in the past. Neither views themselves as competitors or DIY moving as a material portion of their business.

2. Moving rate – Although I am skeptical of this statistic (as moving rates dropping in ’21 seems unlikely to me), if it were to be reversed it would be a massive tailwind for the company. Perhaps this is more likely in a normalized future (when interest rates aren’t increasing quickly) due to increasing polarization, remote work, etc…

3. Interstate one-way moves – Interstate moves are incredibly valuable for UHAL, and they have a monopoly in this area due to their competitive advantages discussed above. These are very profitable moves and were a clear tailwind in ’21 and ’22 and are likely at least 5x the cost of intrastate moves. UHAL can also charge more and use the customer to move their trucks to optimal locations for increased utilization. I think there is a secular tailwind here for the reasons discussed above.

4. As the percentage of renters increases, business gets better, which has been a mild tailwind. Renters move multiple times more than owners. I believe this may also continue to be a tailwind as real estate becomes more institutionalized and housing becomes further out of reach for most Americans.

Value of the Moving Business

Storage Business (2022 Investor webcast charts)

How it Works

As a customer, most typically will book a storage unit online, drive their belongings to the location, and then load them into the unit. It depends on location, amenities, size, and length of stay what the cost of the unit will be, but generally, the first month will be discounted and you will be charged monthly thereafter.

Moat

UHAL’s moat in storage is not comparable to moving, but the moat it does have centers around the ability to have synergies with its moving business which is mainly lower acquisition costs to obtain storage customers. According to various research, CAC in storage is anywhere from $200-$800 per customer, and greater than 75% of users start their process online. To this, according to a sell-side survey, UHAL’s tenants are only half as likely to start their process for a rental via an online search. UHAL also offers customers free storage when they move (which is a common time when one would need storage) which is another nice low-cost CAC advantage and allows them to benefit from their established brand/business. This can allow for: a) better margins or b) lower prices for the customer.

Another somewhat unique advantage for UHAL is the ability to utilize old strip malls or places with large parking lots as storage and moving locations. Although peers and others have retrofitted this area for storage, UHAL can utilize them most effectively. Additionally, UHAL has focused its growth on the capability to build/convert vs buy capacity which has enhanced its returns relative to peers and is unique in the industry. They are not opposed to buying fully-occupied lots, they just think the prices are too high. I know an owner of a storage business where UHAL lost the bid for his assets due to their unwillingness to go above a certain price. Although anecdotal, I like this level of discipline. I believe the strategy insulates them a bit from industry oversupply and the newfound popularity of self-storage. Joe Shoen has a tremendous understanding of the business and flies around and individually underwrites almost all large storage purchases.

Understanding Storage within U-Haul

Due to U-Haul’s strategy, storage projects have a material upfront cost which has been a drag on margins as the portfolio has grown. Below you can see that when occupancy was much lower for the company, there were increases in the percentage of immature units which has now fallen to below 30% (my estimates of <3-year-old units). In 2016, the company started in earnest its build/convert strategy rather than buying occupied units. The company’s percentage of new units is much higher than its publicly traded peers which leads in large part to their lower occupancy figures (and my assumption of lower margins). UHAL has efficiency gains on the horizon and margins should march upward. Additionally, the company does underprice its units and is not as technologically savvy as its public peers. I believe they can raise prices or hold prices better than their peers given their lack of aggressiveness historically and there is also room for improvement in their level of sophistication.

Below you can see how they have built their storage empire which is not at all reliant on acquiring existing assets. This is in my opinion a competitive advantage especially when others are buying assets at expensive cap rates.

Industry

The storage industry has more reliable TAM figures, but it is still a bit uncertain given the level of fragmentation. The storage TAM is generally thought to be around $40-50B, growing at slightly higher levels to moving. Storage can be an attractive business as it has extremely high NOI margins (~70% industry-wide), low operating costs, limited risk of obsolescence, low capital requirements, and high switching costs which leads to pricing power. It has secular tailwinds such as WFH flexibility, increasing market penetration (more customers as a percentage of the population), increasing NIMBYism, increasing difficulty building new units, recurring instances which inspire storage needs such as moving, divorce, and death, as well as general population and wealth increases. Many operators have ancillary revenue sources such as insurance, selling small moving items such as boxes, and 3P property management.

Key drivers of industry performance are:

1. Occupancy Levels – basically supply and demand in each local market. Occupancy levels were at all-time highs during Covid (~95%) and this also allowed for pricing power. Supply levels also took a hit due to Covid-related delays/worries as well as labor costs after a meteoric ~15%+ supply expansion from ’16-’19. We are likely to see some reversion here at all levels.

2. Pricing power – Analysts and experts generally believe storage can increase pricing every year. I am skeptical of this claim, but nonetheless, this is consensus and same-store increases have generally outpaced GDP over time. It is very interesting in that once you get someone in the door, their switching costs (likely renting a U-Haul and spending a day shlepping their things somewhere else) are extraordinarily high. What happens is these customers see very high price increases over time but will continue paying to avoid dealing with the problem, so even though the average user may churn in a year or two, over time this balances out with longer-term customers. The best (longest) clients ironically become the ones being charged the most.

3. Market Consolidation – The market today is incredibly fragmented with mom & pops being most of the competitive set. Consolidation would seem to make sense as the leader in the industry, PSA, by my calculation is <10% of the market. Public storage REITs in total are around 15%-20% of the market. These include Public Storage, Extra Space Storage, Life Storage, CubeSmart, and National Storage. Leaders will have advantages such as brand, centralized systems lowering costs/increasing efficiency, sophistication, and lower cost of capital.

4. Generally Commoditized Offering – The user of the product doesn’t use it very often, so the customer experience is driven by price and location rather than any amenities which means the difference between a state-of-the-art unit and a shed outside is minimal to many customers. You will not have the ability to charge a customer 2-4x because your unit is temperature-controlled and located in a certain area and this is different than in other industries such as commercial real estate.

Value of the Storage Busines

Importantly, they are running through depreciation in storage which leads to understated in this case “NOI” as I calculate it. Remember, I am separating segments in my valuation that the company does not. My NOI for storage and my EBIT for moving will add up to the company’s disclosed EBIT figure. This is different than how storage comparables are viewed. The company disclosed $54M of depreciation related “mostly” to buildings/improvements in the latest quarter, (let’s just use $200M annualized for these purposes) which unlike rental fleet depreciation is largely going to lead to increases in the longer-term value of the business and in my opinion is not really an expense and is non-cash.

Storage maintenance expenses are likely very low, even if I am very conservative at $40M of maintenance capex (indicates >5% of storage revenues which is much higher than industry at ~3-4% my actual guess would be $25-30M), this indicates understated operating earnings of $160M. Let’s even assume $60M is unrelated to storage properties and should run through the income statement (my actual guess is maybe its half of this), leaving $100M of phantom expenses. At a 15x multiple of this “NOI”, we add a not insignificant $1.5B to Storage market value or ~$8/share. I would also note that UHAL’s storage business is not too dissimilar from Life Storage which was just purchased by Extra Space Storage for a $16B+ Enterprise Value which lends some credence to the above values that my model spits out.

Understanding Margins (Left: Investor Webcast Chart, Right: My guesses for margins of each segment over time)

Right now, U-Haul is seeing margin declines vs FY ‘22 which should have been obvious after the performance in ’21 and ’22 and a clear investment cycle from ’16 to ‘20. However, longer-term margins should expand from retrenched levels over time due to operating leverage and most importantly to the increasing percentage of the business attributable to self-storage. Importantly, we are not seeing meaningful downturns in margins in self-storage (my estimates) despite industry weakness due to increasing unit maturations.

As revenues increase in storage, there will be minimal incremental costs besides the opening of brand-new units. New units are immature and thus have low occupancy (ex: In 2020, 5.8M net rentable sq ft added at 2% occupancy.) and are losing money with expenses already implied in the income statement. As these mature, all revenue increases drop to the bottom line. In my view, the multiple one places on UHAL storage could likely be higher than peers despite lower occupancy metrics for this reason. UHAL is not a REIT, so it should be penalized at some level for the lack of tax advantages and its opaqueness. In moving increasing utilization leads to much higher margins due to a lack of corresponding expenses (besides truck maintenance) which we saw in FY ’21 and ’22.

The majority of the company’s costs consist of personnel, maintenance expenses, and liability costs to the fleet. Other smaller costs are taxes, commissions to franchisees, and largely variable freight expenses. Personnel, maintenance, and liability are largely fixed in nature given the company’s business although there are components of variability (maintenance cost will increase if fleet is older/driven more). Management has said incremental margins are above 50% and they were >70% during periods of Covid.

UHAL reinvests its cash flow back into the business in what I believe are attractive opportunities. However, this does not allow the shareholders to see cash flow come back to them via dividends and buybacks, and it’s very difficult to analyze how much value was created due to their storage expansion. We can see in 2021 when the company was worried and slowed its investments just what type of cash flow this business can generate. Before growth capex, by my estimates, they generated approximately $1.25B in FCF in FY ‘22.

Management believes that good EBITDA margins for the company would be in the mid to high 30s with operating margins in the low 20s. I think these are realistically achievable in a normalized environment and if you underwrite to below these margins, returns are still attractive. Management also maximizes for cash flow and will expense anything they can to lower reported income and cash taxes paid. Because of this, analyzing the financials is nuanced and year to year changes can be wider than expected.

Management

Management is one of the more exciting parts of this investment. Joe and brother Mark Shoen are the two largest owners of the company. Since 1994, the company has more than tripled the returns of the S&P. The management team is laser-focused on their 10-yr time horizon and maximizing long-term shareholder value. This ownership mentality trickles down to employees who own >5% through the company’s ESOP plan. The CEO stokes this culture by being in the trenches with employees, constantly being at locations doing tasks of minimum wage employees and promoting from within. He also gives out his personnel cell phone number and answers customers’ inquiries taking customer calls daily to stay close to the business. He will also answer text messages. He has store managers give out their personal cell phones and his kids have worked at the business since their teens in a show of dedication from top management to the business and the customer.

Joe does not do any media, does not talk to Wall St., flies around visiting potential storage locations, and talks about long-term value creation. He is extremely cheap and constantly worried and absolutely ruthless with all competition. These are qualities most value investors adore, and we certainly have them with Joe Shoen.

We can also see this through the compensation structure. No one is getting rich from free stock options and outrageous bonuses. Joe pays himself a million dollars and there is no share dilution. Every business down to the store level is paid a portion of their compensation based on their PnL. The share count has remained remarkably stable over time.

Shoen often makes statements on transcripts referring to old-school value investing ideals and mentions other strong capital allocators such as Mark Leonard of Constellation Software.

Other Noteworthy Items:

UBox is a portable moving and storage box delivered to a location of the customers’ choosing. Essentially, big wood boxes are dropped off at a place where someone lives, the customer loads them, and then the box is transported for them to a new location rather than driving a truck yourself. It is also another feeder for storage. These are especially useful on long-haul or one-way moves. U-box is important because it shows that they are willing to spend to combat disruption and innovate. Sam Shoen, the likely next CEO, and son of the current CEO, oversees this business. It is profitable today, the leader in the industry, and is likely doing ~$400M of annualized revenues. This is not disclosed but makes up most of the “other” revenues category which has been growing extremely quickly (50% in 2022). This to me has real option value with just one other competitor called PODS.

UHAL does around half its moving business through its owned locations which are roughly 10% in number relative to dealer locations. You can back into this by understanding the commission structures and commission expense disclosures. Over time the company’s locations are growing more quickly than franchisee locations which should lead to revenue growth and perhaps some margin expansion.

Land and buildings value is likely to be understated on the balance sheet. Today they have $18.1B in assets, $1.5B in land, and $6.7 in buildings. UHAL has owned some land and buildings for 50+ years, and thus these are likely to be on the BS at a severe discount to their replacement cost.

Finally, the company has an insurance business which I value at slightly above book.

Valuation

Concerns and Risks

The main concerns are generally short-term in nature:

1. High-interest rates could decrease the moving rate and raise cap rates in storage. Other macro concerns.

   1. Pushback: the moving rate has been decreasing for decades and it has not affected the moving business or the storage business. Additionally, this can help with storage units as people leave their stuff in units for longer (these customers are charged the highest rates).

2. The storage business is fragmented, with low barriers to entry, and is arguably moving into oversupply. Occupancy levels reached highs during the Covid-elevated periods.

   1. Pushback: oversupply mitigated by high rates, labor costs, and supply chain, as well as UHAL’s unique properties, price discipline, and ability to utilize areas competitors can’t. Occupancy will move downward to historical averages and pricing will normalize. Competitiveness in customer acquisition favors UHAL on a relative basis due to its low CAC. Buying the company at a discount to intrinsic value to account for these risks is important.

3. Management generally doesn’t speak to investors and is not “Wall St” friendly.

   1. Pushback: I view this as a positive, most value investors will if you read the transcripts

4. Valuation is not screaming cheap and depends on high storage multiple.

   1. Pushback: I tend to agree that it isn’t silly cheap here, but it is still attractive. Luckily this stock has been volatile, and Mr. Market has given investors opportunities to purchase at large discounts to intrinsic value. Around ~$45 is where I would back up the U-Haul. Storage valuation being underpinned by current market M&A.

5. Succession Planning

   1. Pushback: I like Sam Shoen and think the business can continue doing well over a long period of time even without Joe Shoen.

6. Technological disruption such as autonomous vehicles or a better version of self-storage where goods are transported to a location outside of a city center and delivered back to the customer when they want it..

   1. Pushback: Unlikely to occur in the next 10+ years in my view.

What to monitor

To monitor UHAL’s progress I will monitor KPI’s largely discussed above. Moving and storage growth (and how this growth is accomplished whether via pricing, occupancy, utilization, etc…), operating leverage off of normalized figures, management execution, capex spend, and normalized FCF.

Potential unexpected upside could stem from value realization of the storage business through a spinout or a breakout of each segment, a potential sale of the business, increasing liquidity, or a few sell-side analysts explaining the value to the market. This will allow models like mine to be more correct and easier to understand for new investors.

Other important resources

There is a very bizarre backstory about the family and company control. I am only comfortable here due to the period of time that has passed and the performance of the management team. See this Forbes Article

Great past writeups:

https://moiglobal.com/amerco-thesis-201901/

https://valueinvestorsclub.com/idea/AMERCO/8210398636 - many other writeups here as well

https://www.kerrisdalecap.com/wp-content/uploads/2013/10/Amerco-Full-Writeup-Oct-2013.pdf

Podcast and Writeup: https://twitter.com/SleepwellCap/status/1407325809937850369?s=20

Disclaimer: The information provided in this report is for general informational purposes only and should not be construed as investment advice. The author of this article is not a licensed financial advisor and does not guarantee the accuracy, completeness, or timeliness of any information presented herein. Investing in securities or other financial products involves risk, and the reader should carefully consider their own investment objectives, risk tolerance, and financial situation before making any investment decisions. The reader should also consult with a licensed financial advisor or other professional before making any investment decisions. The author of this article will not be held responsible for any losses or damages resulting from any investment decisions made based on the information presented in this article.