Buy UHAL in the Low $60s

Special situations stocks are what we will be discussing today, and we are joined by senior special situations analyst Ian Gilson, CFA, Ph.D for a discussion on one of the main special situations stocks in his coverage.

One of the companies in your special situations coverage is AMERCO (UHAL). How did this well-known company wind up being a special situation, in the first place?

Let's first of all define a special situation. Normally, it is a company which is, in its way, unique. There are no peer companies, i.e. companies that are analogues or very similar. AMERCO does have competition, obviously, but they are by-far the largest in the do-it-yourself truck rental. They're not a cartage company, they're not a trucking company, they're not a car rental company, they're a truck rental company.

So they are special, and it's not followed. There are only two analysts - for many years only one analyst, myself - that have covered the company consistently. So it is, in many ways, a unique company. A very well-known company, with a brand name that is recognized the world over, even though it only has operations in the U.S. and Canada.

How has the past 12 months or so been for UHAL stock?

Well, we had a problem last year that continued into this year. By the way, they are on a March fiscal year, so when I talk about the years for them, I'm talking about the year that ends on March 31st.

Budget (CAR), which is in both the truck and car rental business, expanded their truck fleet too ambitiously. This caused a significant amount of discounting. And the whole industry was essentially penalized. AMERCO's revenue from their truck business fell - this is not a high-growth business, by the way; 2-3% per year compounded.

What can you say? Basically, '07 was slightly below '06 overall, and '08 looks to be down again slightly, about a percentage point. And then we're looking for '09 to be up. Earnings, of course, reflect the fact that this is a service company, and costs are set before revenue is generated.

At what point does the valuation start to look a little bit more attractive to you?

There are several ways to value the company. Earnings, of course - and they do have positive earnings for the year, although it is highly seasonal. It is impacted by bad weather, and the bad weather we've had in the Northeast and the Northwest - there's always bad weather in the Northeast. When that bad weather drops down into the Atlantic states, down into Texas or in the Northwest, then that does impact its revenue, and therefore impacts its earnings.

So the last two quarters - that's December and March - are normally negative quarters. But they will have positive earnings for the year. We anticipate for '08 they will do on the order of $2.45 a share, and the stock is selling in the mid-$60s range. So that's not a very high multiple.

However, the way that I prefer to value the company is basically what they call EBITDAL. Everybody knows what EBITDA is - earnings before interest, taxes, depreciation and amortization. The company has a great deal of flexibility in buying trucks. It can either borrow money and buy trucks, or it can buy trucks directly from the manufacturers. So they like to say that their interest depreciation and amortization of trucks basically even out. The lease expense is the L in EBITDAL.

So we're looking this year at close to $28 per share of EBITDAL, and that is probably going to be about the same next year. To be precise, it was $28.86 last year. So you look at that and you say you have a stock here that is selling at three times EBITDA and less than three times EBITDAL, and that is at the low end of its historical valuation.

With all this in mind, then, how would you advise investors play UHAL shares?

Wait for a bad market and the dip - which we've just had another one of - when the stock gets down to the $60-63 range. It's probably going to bump around there until the market turns up a little bit. And then I would expect it to go up into the high-$70s or the $80 range. So you've got the possibility over the next six-to-nine months of a 30%+ improvement in stock price.

Ian Gilson, CFA, Ph.D is a senior analyst covering special situations stocks for Zacks Equity Research.

Matsushita Warrants a Hold

The following excerpts explain why Zacks senior electronic industry analyst Steve Biggs, CFA remains neutral on Matsushita Electrical Industrial Co., Ltd. (MC), the electronic products manufacturer:

'Matsushita has established itself as a global company that uses leading-edge technology to manufacture electronic and electrical products, systems, and components. The company's management initiatives are also helping to develop competitive and value-oriented products.

'While we look forward to the upcoming third quarter 2008 earnings report, on October 30, Matsushita Electrical Industrial Co., Ltd announced financial results for the second quarter of fiscal 2008. Results for the quarter were well above management's forecast issued on July 24. Operating margins increased 10 basis points year-over-year to 6.4% due to lower selling, general and administrative expenses. For the reported quarter, Matsushita posted a net income of $558.1 million or $0.26 per ADS versus net income of $683.1 million or $0.31 per ADS in the prior-year quarter.

'Matsushita generated $995.3 million cash from operating activities during the quarter. Results for the reported quarter were based on an average exchange rate of approximately 117.92 Japanese yen per U.S. dollar. Matsushita exited with $11,402.4 million in cash, cash equivalents, and marketable securities as well as $1,799.6 million in long-term debt. These dollar values were based on a period-end exchange rate of approximately 114.91 Japanese yen per U.S. dollar. However, this is priced into the shares.

'However, the recent battery recall on Nokia (NOK) phones has hurt its brand image. As such, we maintain a Hold rating on Matsushita and set a six-month price target of $20.50. Shares of Matsushita are currently trading at 19.8x fiscal 2008 EPS, which is well below the mean of its peers, we believe that the company has demonstrated execution on its restructuring plans, and is positioning itself for growth over the long-term. '

Align Set Straight

An update has just come out today on Align Technology, Inc., (ALGN), in which senior medical products analyst Gregory Aurand, CFA is restating his Hold rating on the company. We excerpted the following details:

'To improve long-term results and enhance the customer experience, the company has launched its Vivera retainers in a subscription program. In our opinion, the Q307 flat ortho and GP utilization suggests the company may have fully tapped the former OrthoClear customer base, as well as fully penetrating the most easily reached segment of the U.S. malocclusion cases (currently about 20% penetration of the addressable U.S. market).

'It remains unclear how much of the market ALGN can continue to capture consistently or how profitably they can reach their target growth. Note that our 2008 EPS estimate is fully taxed at 35%. Given its unique market position, we believe ALGN should trade at a premium to the group average of 3.3x 2008 revenues and the industry mean average of 2.1x 2008 revenues.

'However, we believe the current stock valuation adequately reflects the outlook. We rate the stocks as a Hold. Our target price, roughly equal to 4x our 2008 revenue estimate, a 20% premium to the average of comparables and a 90% premium to the industry mean, remains at $19.00.'

Good Price for TSO

Zacks energy sector analyst Sheraz A. Mian has maintained his Buy rating for oil refining company Tesoro Corporation (TSO). While leaving all other determining factors unchanged. Here we bring you some of the reasons behind his views:

'We are maintaining our Buy recommendation on Tesoro shares following the company's analyst meeting where it unveiled a five-year organic growth plan aimed at improving operating efficiencies.