Travel Centers of America: Undervalued Stock?

I have started looking into Travel Centers of America (TA) as a possible value play. The stock is currently trading at a little over $3 per share and at its peak a few years ago it had traded as high as $46 per share. The company has suffered the last year and half due to declines in the trucking volumes during the recession. The trick here is to figure out whether the company will be profitable again as the economy rebounds.

On the surface, the financials appear to be really good with almost $182 million in cash and about $100 million in debt. As a reference, the current market capitalization of the company is short of $60 million. Its book value also seems to be in the $20 per share range compared to its share price of around $3.25. As you would imagine, this does not always tell the whole story. This company operates in an industry where working capital and cash flow can make or break a company. At first glance, the company appears to have been generating positive or close to zero cash flow every quarter (cash on hand has increased year over year but that could mean anything).

This stock came to my attention as Leucadia initiated a small position in it a while back.

A more detailed analysis will follow and if it appears to be an otherwise not very distressed company with a distressed stock price with a potential for great capital appreciation as the economy improves, I will initiate a position.

Comments

[Jeff Geygan:]

This is a very complex story. You are right, there is more to it than meets the eye. For starters, the company has a realtionship with HPT (who spun off TA several years ago) in which there are clear conficts. In fact, a shareholer suit on behalf of TA vs HPT (see Kahn v HPT in the 10-k) may resolve the conflict leaving TA in a more favorable operating position.

Additionally, TA has a rent deferral agreement with HPT that currently that allows the postponement of $5 million per month in rent - see balance sheet for accruing liability. This explains in part the surplus of cash. However, at year end if TA doesn't pay back the deferred rent, it begins accruing at 12%.

If this is going to be a great investment in the future, the company must continue to control 'site level' operating expenses, drive non-fuel (high gross margin, i.e. 60%) sales and experience a return of normal levels of transportation traffic.

The CEO, Tom O'brien, seems committed to the company. He however has an employment history with HPT that may potentially blurr his good management vision. O'brien has been working hard to control costs having initiated several cost control programs in 2008. This is the time when his efforts could pay off for shareholders.

By the way, I am long the shares.

Sep 02 09:35 PM

[Value Scouter:]

The company is really cheap now, selling only 0.2 at its book value and there is not much of intangibles on its book. Its operation margin improved over the last few quarters, it also showed modest cost reduction, although mostly from discontinued operation.
It has sufficient working capital and good current ratio to weather further decline in the economy. Not in a hurry to pay down its debt. So the company is positioned itself well once the economy picks up again. I can imagine the inventory reduction by distributors does not go too long, so we should see some modest increase in trucking activities. But 3Q and 4Q revenue is also impacted by reduced vacation and weather.
All in all, it seems like improvement was made on operation side, go in at current price level and wait for the recovery made be worthwhile to consider.
The company has real thin margin, so volume is everything. One risk is on the Capex side, it has high Capex spending in previous years and has wean it down in recent quarters. That can eat up any profit it comes up with.
I don't yet own the shares of TA, but may initiate a small position.

Sep 04 01:17 PM