Travel Centers of America (TA) is one of those rare investing opportunities that a value investor spends countless hours looking for. We will analyze the investment thesis for TA in two parts. In this part, we will estimate the intrinsic value of TA looking at its Assets and Liabilities. Next part will cover the analysis using the EPV or Earnings Power Value of TA.
For our analysis, we will start with the latest Quarterly Report available for the Q2, 2009.
This gives us an intrinsic value of the business based on its assets as 805 – 554.5 = $250.5 million or $15 per share.
As the company is now operating at a slight loss we should demand a margin of safety of 50% of the intrinsic value. This allows us to be comfortable knowing that the company has room for some asset value erosion if the business continues to operate at a slight loss in the future. It does seem that even a 1% increase in the trucking volumes will push the company to profitability (as it has worked hard to improve its cost position in the last few years). More on this in the next post.
A value investor should thus be comfortable paying up to $7.5 per share for TA. Mr Market currently is offering up the shares at $5.75 so it is an attractive buy at almost 65% discount to the intrinsic value. I acquired the shares at $5.2 (plus commissions) last week.
Additonal thoughts: The relationship with Hospitality Properties (NYSE:HPT) is a net asset for TA due to HPT’s inclination to work with the company to make sure it remains on the sound footing. Additionally, the recent rent deferral agreement in exchange for TA equity is also a net plus as it can be viewed as a call option that TA holds at a strike price below $3 and that it can exercise at the time whenever it decides to not defer its rent (in the amount of rent deferral not taken) or when it decides to pay back the deferred rent. We have not calculated the value of these assets, comfortable in the thought that they just work to increase the margin of safety in our investment.
Disclosure: Author holds positions in the above mentioned stock.