I have been bullish on TravelCenters of America (NYSEMKT:TA) for a while, covered here and here, even though the stock did not always agree with my analysis, but now that reports of interest from various investors, including a respectable private equity firm, are gaining traction, the opportunity to unlock what might be significant value for the shareholders looks closer than ever.
One can assume that as the activism picks pace, well-covered and one of the biggest irritants for the public shareholders - agreements with the Hospitality Properties Trust (NYSE:HPT) - may get taken care off while other issues, be it the improving fuel efficiency capping truck fuel market growth, stable oil prices and its impact on the fuel gas margins or weak demand from the energy sector, are mostly discounted in the stock that is trading around 10-11 times next year's earnings and 4.5-5 times EV/trailing 12-month EBITDA.
The broader thesis for top-line growth continues to remain strong, decent growth in volumes, regulatory changes like limiting the drivers' hours of service, leading to more time and service requirements at the center, acquiring underperforming centers, building new centers and expanding convenience store footprint.
These murmurs may continue to get louder
Last year, the Board was recommended by an activist fund to use a portion of its cash balance to repurchase stock, sell its real estate and separate the truck-repair business. Bears shrugged off the recommendation at that time as an isolated event, but earlier this week, WSJ reported, which was confirmed by the company, about the interest expressed by Golden Gate Capital, a private equity firm.
Even though the company rejected the $14 per share bid in December, the private equity firm is believed to be still interested in the deal, even though the firm may not go for a hostile bid. Looking at the stock as well as the broader equity market performance over the last few months, one can safely assume that the pressure on the management to create value for the shareholders might increase.
Fundamental improvements continue to offer help
While investors may be pushing management to create value, improving fundamentals might attract even more interest from private equity or other strategic investors. Acquisitions, new services, refurbishing existing stores and improving retail fuel margins promise that waiting for a strategic deal alone is not the only driver for the business.
Fuel margins were negatively impacted in the most recent quarter, partly due to a difficult comparison to a favorable purchasing environment seen during the first quarter of 2015 when the oil price volatility offered opportunities on the purchasing front, but the impact was partly offset by volume increases. In the meantime, retail margins continue to show improvement. The non-fuel gross margins within the travel center segment are benefiting from quick service restaurant, parking services, and diesel exhaust fluid offerings while the recently acquired sites are helping the non-fuel margins for the convenience store segment.
Over the last five years, TA has purchased or agreed to purchase almost 37 travel centers and more than 240 convenience stores, and the integration, as well as ramp-up initiatives, promises to help non-fuel sales and margin improvement. As for progress, in the last quarter alone, TA started to offer branded gasoline at 17 locations, converted 48 stand-alone convenient sites to the Minit Mart brand, added 14 quick service restaurants to the company's convenience stores and closed on the acquisition of Quaker Steak & Lube, for which it plans to use the franchising model to grow.
Still on discount
The valuation continues to offer the bargain it has been for a while, with the stock trading at 10-11 times forward earnings, but more importantly, there is significant room to not just close the relative gap with other convenience store and fuel station chains like Casey's (NASDAQ:CASY), CST Brands (NYSE:CST) and Murphy (NYSE:MUSA) that are trading at 15-20 times, but with growing portfolio of convenience stores and QSRs, the standalone business also seems ready for a higher trading multiple.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.