Hamilton

TravelCenters of America: Long Value Play

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.

Travel Centers of America: Rare Value Investing Opportunity

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.

U.S. Refiners Don't Look Cheap (Unless We're Going Back to '06-'07 Environment)

Correct me if I'm wrong, but refining profit margins are in the $11-12 per barrel range now vs $3-4 per barrel in 2002. An analysis of this might be more valuable. Additionally, the huge decline in crude prices is freeing up a ton of working capital that can be re-deployed and allows refiners to avoid using expensive lines of credit to purchase expensive inventory.

Bankruptcy Is Good for Satyam

The businesses you name lost a lot of money. Satyam had a bunch of money stolen from it, and they know who did it. That's a big difference. I don't see how anyone could take your comparison seriously.

Who Will Benefit from Saytam's Failure?

There definitely are questions about whether the company can recover. As I see it, there are three significant risks with putting money in Satyam right now:

1) The re-stated financials may show that the company does not have much earnings power or is in poor financial condition
2) They can't find temporary funding to cover expenses
3) They lose a lot of their customers

My hypothesis is that the company's earnings and financial standing is not significantly different from what was reported earlier. This is the key, because if this picture starts to form, the funding will come and the customers will stay. It may be a while before re-stated financials are released, but I think insiders have a pretty good idea of what is left already.

Who Will Benefit from Saytam's Failure?

Andrew,
I think you've got the Satyam story wrong.

In my opinion, Raju stole the money, plain and simple. When you say "Satyam reported it cooked the books" you should really be saying "Raju claimed he cooked Satyam's books." Because that's all that happened. And you should also be aware that dishonest people lie, and their claims need to be examined thoroughly before they're accepted as fact.

I don't believe he cooked the books. Instead, his book cooking claim was a red herring used to throw investigators off his thieving scent. Inflating revenue in the manner he claimed would be very difficult to do given the nature of Satyam's business, its customers, and its auditors. The cash and revenue would be fairly simple to audit. Additionally, Satyam's financials as reported are not as unreasonable as Enron's were; they are perfectly in line with those of the competitors you recommend. So unless the competitors you are recommending are cooking the books as well, it is unlikely that Satyam ever was.

Raju did not cheat, instead, he stole.

He originally tried to steal by using Satyam's capital to purchase Matyas, his son's construction firm. When this failed, he stole the money, gave it to his family by siphoning it through his 300 companies, and pretended it wasn't there. And that's it.

I consider Satyam to be a solid, swiftly growing business, like many of the other BPOs you mention. The only difference is that Satyam had $1 billion stolen from it by its crooked former CEO. As a result, the future of the company is murky.

However, it is my opinion that the value of the company is more in line with what the market believed it to be 2 months ago than with what the market believes it is now, and it will not be the people who own Wipro and Infosys who benefit most, it will be the people who purchased Satyam stock during the panic.

Cheers,
Hamilton