TravelCenters of America: A Small-Cap Opportunity Related To Trucking

| About: TravelCenters of (TA)
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I once wrote on trucking and how demand was perking up in that sector, even though valuations were kind of stretched. In the end, I passingly mentioned a small stock that could be interesting given its correlation with the sector. That stock was TravelCenters of America (NYSEMKT:TA).

The stock behaved well, though recently it lost most of the gains it had made. I think this is happening on two accounts. On one hand, the stock is reporting its earnings at the very last possible time, March 15, when shareholders were expecting an earlier release. And on the other, gasoline consumption and deliveries have been running low and since so much of TA's business is selling fuel and gasoline, there's legitimate fear that it might be impacted by this trend, even though fuel oil has been impacted less severely, as we can see in the charts below (source: EIA).

Click to enlarge charts


Still, there are several reasons to be positive on TA. The first of them is valuation. TA is as cheap as you'll ever find a stock this side of a fraud (which TA isn't). It trades at a forward 2012 P/E of 6.2, and at an unbelievable TTM EV/EBITDA of 1.5. TA has no net debt, and also trades at a price/book value of 0.42.

It's an incredibly cheap equity by any angle, yet, it has a strong trend going for it.

Trucking Demand

That trend is the powerful recovery in trucking demand, as can be seen in the ATA Truck Tonnage Index (source: Calculated Risk):

TA benefits from any resurgence in trucking, since it operates and franchises travel centers along the U.S. interstate highway system, geared toward selling fuel and providing other services to truckers. Trucking itself is recovering both based on the overall economy performing better, and specifically on housing and auto production improving. There are segments of the economy that aren't doing so well, like coal, but those are mainly transported via train.

TA also seems to have a reputation for quality:

In the fall of 2011, Overdrive magazine conducted its annual "Voted Best" survey. The results showed that drivers prefer TA and Petro over the next closest truck stop brand three to one in the best overall truckstop category. TA and Petro dominated the survey in 26 other categories, including best overall food four to one, friendliest restaurant staff four to one, best breakfast four to one, and best buffet five to one.

One Cautionary Issue

There's a single issue that demands caution, and that will always explain some kind of discount for TA. Basically, TA does not own the locations it operates. Instead it leases them mostly from Hospitality Properties Trust (NYSE:HPT). HPT is managed by REIT Management & Research (NASDAQ:RMR), which is majority-owned by Barry Portnoy. TA was spun-off from HPT and right now Barry Portnoy has a higher interest on HPT than he has on TA, which might mean that he can favor HPT when setting the leases and other contractual affairs. Also, TA's CEO and CFO are employees of RMR and two of its managing directors (one of whom is Portnoy) are also directors for RMR (source: Nathan Kawaguchi,

This apparent conflict of interest might make it hard for TA to trade at a full valuation, and is clearly the biggest issue for this equity. Indeed, in the past there has been a lawsuit to bring the lease prices for TA more in line with the market.


TA is a hugely undervalued equity that's greatly favored by the overall economic recovery, and more specifically, by the ongoing trucking industry recovery.

The main risk lies in the control structure having the chance to benefit a key supplier against the interest of TA shareholders. This will probably mean TA will always trade at a discount. But it's still arguable that the present discount is simply too massive, and the stock can easily double from its present quote and remain cheap. TA reports on March 15 and has been trading weakly, so there's some headline risk.

Disclosure: I am long TA.