TravelCenters Of America (NYSEMKT:TA) recently priced a stock offering of 6.5M shares at $9.25 and the stock has suffered since. Still, analysts have been increasing estimates for this year and next and the stock is a Zacks Rank #1 (Strong Buy) and it is the Bull of the Day.
Strong Auto Sales
For the past several months, US auto sales have shown consistent growth. The sequential growth has been small, but the year over year growth was impressive. There was a big drop off in September as new models hit the showroom floors, but as we rolled into the November 1 sales numbers, the growth returned.
This page from the Wall Street Journal breaks down auto sales in a fairly high level of detail. It's interesting stuff no doubt, but the overwhelming idea that you should get from scanning that page is that people are buying new cars.
TravelCenters of America operates travel centers primarily along the US interstate highway system. It offers diesel fuel and gasoline, and operates full service restaurants primarily under the Iron Skillet and Country Pride brand names. As of August 12, 2013, it operated and franchised approximately 500 travel centers in 42 states and in Canada under the TravelCenters of America, TA and Petro Stopping Centers brand names. The company was founded in 1992 and is headquartered in Westlake, Ohio.
Beat and Offer Stock
You probably have heard of beats and raises, but how about beat and stock offerings? Well that just happened for TA, as they recently beat estimates and then a few days later offered 6.5M shares at $9.25 per share, raising roughly $60 million.
The company reported earnings of $0.56 on November 4, and that was $0.12 ahead of the Zacks Consensus Estimate for a 27% positive earnings surprise. This beat caused investors to bid up shares of the company, which moved higher by 15% during the session following the release.
A few days later the beat, the secondary hit, and with roughly 30M shares outstanding at the time, the 6.5M shares being added is a significant dilution of present ownership. A large portion of the proceeds of the offering will go toward paying for the acquisition of Girkin Developments' interest in 31 convenience stores in Kentucky and Tennessee.
TA Sees Estimates Moving Higher
As we look back over the last few months, we see that analysts are starting to move their estimates higher. The Zacks Consensus Estimate stood at $0.34 for August through October, but that was increased to $0.42 in November following the recent beat and has now ticked higher to $0.45 in the month of December.
The Zacks Consensus Estimate for 2014 also saw a bump higher. Unlike the 2013 estimate, the 2014 number didn't budge until recently. The 2014 Zacks Consensus Estimate was $1.06 for four months, and is not at $1.20.
One thing I look for is a big implied earnings growth rate. TA has just that, 166% in fact.
TA has a very solid valuation picture. The forward PE of 19.6x is still well below the 26x industry average. The price to book multiple of 0.7x is far below the 4.5x industry average and the price to sales multiple is also below the industry average. As I look to the margin analysis, I see that TA has a 0.2% net margin compared to a 4.7% industry average. TA is expected to see 5% topline growth next year, which is below the 7.7% industry average, and growth of 166% in EPS compared to 24.5% EPS growth for the industry average.
The price chart for TA shows that you need to have some degree of resolve to buy this stock. While the most recent quarter was a beat and a 15% increase then followed by the stock offering which has brought the stock back down, one's eye is drawn to the large plunge the stock took back in the summer. As the impact of the offering is absorbed, the growth in revenue and earnings due to 31 store additions will have a positive impact over the next few quarters. With some and improved results, TA could see multiple expansion and that would dramatically increase the price of the stock.