TravelCenters of America: Long Value Play

TravelCenters of America (TA)

Recommendation: Long

Target: $18.00+

DESCRIPTION
TA operates and franchises travel centers primarily along the US interstate highways. The primary customer base consists of professional truckers and regular motorists. TA owns and operates 188 travel centers and is involved in 45 others that are franchise owned and/or operated.

THE STORY

TA represents a solid reward/risk opportunity on both a fundamental and a technical level. From a fundamental standpoint the core reasoning for this trade is the closing of the spread between the tangible book value and the market valuation. The current market price of $7.77 per share represents an approximate 58% discount to tangible book value ($18.36) and the potential for a return of 135%.

TA uses fuel volume/margin and non-fuel revenues as their primary metrics for performance. For the quarter ending 06/2009 TA saw a decline of 10.7% in fuel sales volume, a 2.5% decline in fuel margins, and an 8.4% decline in non-fuel revenues. This decline should have been anticipated due to overall economic conditions. As the economy strengthens and more truckers and motorists are back on the road more often TA should see a return to growth in these metrics.

In terms of short term liquidity I don’t believe TA will experience any shortfalls. TA enjoyed free cash flow of approximately $87mm in the trailing twelve month period with EBITDA of $38mm over the same period. The firm currently has approximately $180mm ($10.80 per share) in cash on their balance sheet.

There are two primary risks. The first is the obvious… if the economy does not recover as expected then the return of motorists/truckers to the road won’t materialize. The second and more immediate risk deals with competition. As of July 2009 Flying J, a competitor of TA’s, announced a preliminary agreement to sell its interests through bankruptcy to another competitor, Pilot Travel Centers. Management expects the combination of these two firms would “significantly alter the competitive landscape in the travel center industry”. I don’t have any color as to how negative of an impact this would have on TA but I do believe it is probably already priced into the market’s valuation.

EXPECTATION
I expect the market to bring TA’s valuation into harmony with tangible book value ($18.36). What we essentially have is a company trading at less than cash and less than 50% of tangible book value. In my opinion TA was rightfully sold off when the economy was showing Armageddon. However as the economy returns to growth, even if spurred by inflation, TA should return to profitability which in turn should bring the market’s opinion of it back to at least tangible book value.

TECHNICAL ANALYSIS

The chart on top is a three month daily and the chart on the bottom is a three year weekly. On the left we’re showing a strong pullback on 10/26/09 which represents a better entry point that previously recommended. I wouldn’t be surprised to see TA head back down to the $5.00 - $6.00 range and consolidate a bit prior to breaking higher. In terms of reward/risk this represents a very solid entry point. When viewing the longer-term chart we see that TA was trading upwards of $45.00 back in early 2007, quite recently after going public. The company has since been consistently hammered and reached a low of approximately $2 and more recently climbed to a 1.5 year peak of $8.75. As the economic recovery continues to prove itself this name should, at a minimum, head back to tangible book.

Comments

[David Schrader]

I am currently long, forgot my disclosure.

2009 Oct 27 07:12 PM

[Ken Tinney]

One thing I don

2009 Oct 28 09:21 AM

[Ken Tinney]

One thing I don't understand about TA is its property and eqpmt assets. In the latest quarter it was listed at over $400M but the company does not own the land where its travel centers are located. That's owned by its former parent company which is a REIT. So PP&E may be overstated. If anyone knows more please ellaborate.

2009 Oct 28 09:29 AM

[rrtzmd]

...what I don't understand is the 182 million dollars in cash on the balance sheet...that works out to about 11 bucks a share in cash...I don't see any debt on the last 10Q...yet it's trading around $5...am I missing something?

2009 Nov 02 08:54 AM

[Dick Stanton]

Can you explain why the stock is in the $3.00 range? Nothing has changed since last quarter, cash is still at $185M ($11 per share) with a book value of $22. The stock market appears to be rebounding - why is this stock going the opposite direction?

Please advise on your thoughts

2009 Nov 11 04:27 PM

[Hamilton]

I saw this article and was mildly intrigued. However, a brief analysis changed my opinion.

Breakdown of PP&E: Approximately $200m is land and buildings, $100m is equipment, and $100m is leasehold improvements. I don’t know any more than this, and I have no idea how these assets would be treated in a liquidation situation.

Cash: The large cash balance is deceiving because of the deferred rent and deferred rental allowances. If these are subtracted from the cash balance as they should be, cash is more like $25 million.

Debt: Under an operating lease, a portion of rent is essentially considered interest, and a portion is essentially considered principal, making it a similar instrument to debt. So the company essentially has $102 million in debt, which offsets the $25 million in cash.

My concern about using an asset approach when investing in this company is the nature of the relationship between it and Hospitality Properties Trust (HPT), its landlord and former owner. Without investigating the situation further, my guess is that HPT may have claims on many of the assets listed on the balance sheet, and would receive many of them in liquidation.

As a result, I think the best way to value this company should be based on its earnings power, but this is nearly impossible due to its extremely high operating leverage. According to the most recent conference call, it earned $60m EBITDAR in 3Q 2009 versus $88m in 3Q 2008 (which was record high due to high retail gas spreads) versus approximately $53m in 3Q 2007. Monthly rent expense of $58.5m (which even in the best quarter I could find was 70% of EBITDAR, meaning they are probably paying WAY too much) yields EBITDA of $1.5m in 3Q 2009 and $28m in 3Q 2008. As you can see, this business has HUGE operating leverage due to what appears to be unfairly large rent payments. A 30% decrease in EBITDAR leads to a 95% decrease in EBITDA. This is before factoring in maintenance capex of $6.5m, which yields rough cash flow estimates of -$5m and $21.5m for 3Q 2009 and 2008, respectively.

With $102m in operating leases minus $25m in cash plus a current market cap of $60m, I get a rough enterprise value estimate of $137m. If you annualize the 3Q 2009 EBITDA numbers, this yields an EV/EBITDA of 22.8, while using the record 3Q 2008 numbers yields an EV/EBITDA of 1.2. EBITDA in 3Q 2007 was negative, so the decrease between 2008 and 2009 is NOT primarily due to economic weakness. The volatility in operating results is primarily fueled by retail spreads on gas which have ranged between $0.08 and $0.12 during the time period.

I would argue that TA is a highly leveraged, speculative play on retail gas spreads rather than a value play. It has an awful competitive position as suppliers like Coke, Burger King, and Exxon reap most of the industry profits, while the rest goes to its landlord and former owner, HPT, due to what appear to be onerous lease agreements. In my opinion, TA’s share price has declined precipitously not because of the economy, but because of an outrageously priced IPO. Investors have fled because of an increased understanding of the lopsided relationship with HPT, not because of an overreaction to reversible changes in TA’s expected operating results.

While it may be possible to capture large profits in this stock due to price volatility, I would only invest if I had reason to believe that retail gas spreads will stay near $0.12 per gallon indefinitely.

2009 Nov 12 11:50 AM

[babajay]

Excellent work... Did you notice what management is paying themselves.... ? Unreal... Bad Leases , Picking off investors with a terribly priced IPO , misleading balance sheet , it may be best to look elsewhere for investment ideas. These people, I may be wrong, do not seem like "NICE" people to me.


On Nov 12 11:50 AM Hamilton wrote:

> I saw this article and was mildly intrigued. However, a brief analysis
> changed my opinion.
>
> Breakdown of PP&E: Approximately $200m is land and buildings,
> $100m is equipment, and $100m is leasehold improvements. I don’t
> know any more than this, and I have no idea how these assets would
> be treated in a liquidation situation.
>
> Cash: The large cash balance is deceiving because of the deferred
> rent and deferred rental allowances. If these are subtracted from
> the cash balance as they should be, cash is more like $25 million.
>
>
> Debt: Under an operating lease, a portion of rent is essentially
> considered interest, and a portion is essentially considered principal,
> making it a similar instrument to debt. So the company essentially
> has $102 million in debt, which offsets the $25 million in cash.
>
>
> My concern about using an asset approach when investing in this company
> is the nature of the relationship between it and Hospitality Properties
> Trust (HPT), its landlord and former owner. Without investigating
> the situation further, my guess is that HPT may have claims on many
> of the assets listed on the balance sheet, and would receive many
> of them in liquidation.
>
> As a result, I think the best way to value this company should be
> based on its earnings power, but this is nearly impossible due to
> its extremely high operating leverage. According to the most recent
> conference call, it earned $60m EBITDAR in 3Q 2009 versus $88m in
> 3Q 2008 (which was record high due to high retail gas spreads) versus
> approximately $53m in 3Q 2007. Monthly rent expense of $58.5m (which
> even in the best quarter I could find was 70% of EBITDAR, meaning
> they are probably paying WAY too much) yields EBITDA of $1.5m in
> 3Q 2009 and $28m in 3Q 2008. As you can see, this business has HUGE
> operating leverage due to what appears to be unfairly large rent
> payments. A 30% decrease in EBITDAR leads to a 95% decrease in EBITDA.
> This is before factoring in maintenance capex of $6.5m, which yields
> rough cash flow estimates of -$5m and $21.5m for 3Q 2009 and 2008,
> respectively.
>
> With $102m in operating leases minus $25m in cash plus a current
> market cap of $60m, I get a rough enterprise value estimate of $137m.
> If you annualize the 3Q 2009 EBITDA numbers, this yields an EV/EBITDA
> of 22.8, while using the record 3Q 2008 numbers yields an EV/EBITDA
> of 1.2. EBITDA in 3Q 2007 was negative, so the decrease between 2008
> and 2009 is NOT primarily due to economic weakness. The volatility
> in operating results is primarily fueled by retail spreads on gas
> which have ranged between $0.08 and $0.12 during the time period.
>
>
> I would argue that TA is a highly leveraged, speculative play on
> retail gas spreads rather than a value play. It has an awful competitive
> position as suppliers like Coke, Burger King, and Exxon reap most
> of the industry profits, while the rest goes to its landlord and
> former owner, HPT, due to what appear to be onerous lease agreements.
> In my opinion, TA’s share price has declined precipitously not because
> of the economy, but because of an outrageously priced IPO. Investors
> have fled because of an increased understanding of the lopsided relationship
> with HPT, not because of an overreaction to reversible changes in
> TA’s expected operating results.
>
> While it may be possible to capture large profits in this stock due
> to price volatility, I would only invest if I had reason to believe
> that retail gas spreads will stay near $0.12 per gallon indefinitely.

2009 Dec 07 04:10 PM