At the onset of the COVID-19 pandemic, the near-apocalyptic concerns about economic viability had several investors rushing for the exits, initially taking down U-Haul (UHAL) for good reason. Faced with a once-in-a-century pandemic, the negative implications of the global health crisis presented an ugly picture for the rental truck and self-storage provider.
However, UHAL stock – along with several other publicly traded assets – quickly shot higher from the spring 2020 doldrums. Primarily, the ultra-low interest rate environment (a consequence of the Federal Reserve’s aggressive actions to combat recessionary threats) inspired those flush with cash to buy up hard assets, particularly real estate. In turn, downwind beneficiaries like U-Haul reaped the rewards.
But beginning in 2022, a paradigm shift materialized. With inflation skyrocketing, the Fed pivoted in the other direction, implementing a decisively hawkish monetary policy. Unsurprisingly, this decision impacted the housing market, deflating buyer sentiment as borrowing costs soared. Therefore, what turned out to be a fortuitously aligned investment might now be an economic harbinger.
Unusual Options Volume Clouds UHAL Stock
Following the close of the final trading session of May, UHAL stock became a highlight (of sorts) in Barchart’s screener for unusual stock options volume. Specifically, total volume reached 2,589 contracts against an open interest reading of 7,155. Moreover, the delta between the midweek session volume and the trailing one-month average metric came out to 617.17%.
Drilling down, call volume only managed to reach 815 contracts while put volume landed at 1,774 contracts. This pairing yielded a put/call volume ratio of 2.18, on paper favoring the bears. Fundamentally, it’s difficult to appreciate the contrarian view of UHAL stock.
Mostly, that’s because of management’s own discouraging admission. For the fiscal fourth quarter of 2023, U-Haul rang up revenue of just under $1.19 billion, which the Motley Fool described as being marginally lower on a year-over-year basis. Generally, the top line met Wall Street’s consensus expectation.
However, circumstances decidedly got ugly on the bottom line. Here, U-Haul posted net income (on a GAAP basis) of $37.7 million or 16 cents per share. In the year-ago quarter, the company generated net income of $86.7 million. Sadly, the rental and self-storage specialist badly missed the consensus profitability target of 50 cents per share.
In the open market, UHAL stock fell more than 16%, a staggering erosion. Incurring choppy but mainly positive trading prior to the fiscal Q4 report, UHAL now is forced to tread water. Since the January opener, shares have fallen 11.42%.
U-Haul chairman Joe Shoen remarked that, “[o]verall moving activity has returned to more historic trends. Self-storage is not as hot as 24 months ago, but we are still building and filling new units.”
Put another way, the old paradigm has returned, catching UHAL stock off guard. What might be problematic is that demand loss could be impacting other sectors of the economy.
Layoffs and Consumer Debt Pose Challenges for U-Haul
While U-Haul features a diverse business, its equipment rental line item represents the lion’s share of the company’s total revenue. In fiscal Q4 2023, self-moving equipment rentals clocked in sales of $726.3 million or 61.1% of all sales. On the other hand, self-storage came in at $195.2 million or 16.4% of the overall tally.
Don’t get me wrong – self-storage represents a key driver for UHAL stock. Nevertheless, it’s the self-moving component that is the heart of the company. Unfortunately, without a core bullish catalyst within the real estate market, U-Haul might suffer even more down the road.
Fundamentally, investors should be careful about the contrarian case undergirding UHAL stock because of the convergence of significant consumer headwinds. Front and center are the mass layoffs that have erupted at some of the biggest companies this nation has to offer. These aren’t burger-and-fries jobs but technology-centric occupations that easily command six-figure annual incomes.
As these layoffs are occurring, total household debt recently came in at over $17 trillion. Just as startling, credit card debt spiked to a record $930 billion last year. Therefore, it’s no wonder that Americans aren’t buying homes with gusto anymore. Simply put, they lack the resources to move under this environment.
That being the case, investors need to take a realistic view of UHAL stock.
Few Positives Remain
In the most recent earnings disclosure, self-moving equipment rentals incurred a revenue loss of 5.53%. That’s to be expected given the high interest rates and the aforementioned consumer economy challenges. However, self-storage facilities – even during poor economic times – offer utility.
Basically, these storage units enable people to keep a bunch of bulky items that they don’t need on a daily basis. With the cumbersome items out of the way, savvy consumers can downsize their residential units, saving significantly on rent.
To be sure, self-storage revenues did pop 17% against the year-ago quarter. However, it wasn’t enough to overcome the shortfall in equipment rentals. Because this arena probably won’t be cured for a while, investors should be careful about pursuing contrarianism in UHAL stock.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
