|Shares Out. (in M):||17||P/E||NA||NA|
|Market Cap (in $M):||57||P/FCF||NA||NA|
|Net Debt (in $M):||27||EBIT||0||0|
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Investment Thesis - TravelCenters is a long because:
¦ TA trades at about 2x normalized cash flow.
¦ Minimal liquidity risk makes a permanent impairment of capital unlikely.
¦ The company's well-documented corporate governance issues should not be overly problematic.
Maybe the third time's a charm ... TA has been written up twice before on VIC as a long idea (by madler934 in February 2007 at $34.50/share and in November 2007 by ladera838 at $26/share). At the time, TA appeared to have the characteristics of a classic orphaned spin-off. However, a combination of high operating leverage, strong sales correlation to U.S. economic activity and shady corporate governance combined to burn holders (including many thoughtful value investors). While these issues remain, the extremely low valuation and progress on cost reductions warrant another look at TA.
(Please refer to the previous write-ups for a description of TA's business and recent history)
TA's sales volumes are closely tied to overall U.S. economic activity; nearly everything manufactured or consumed in the U.S. is on a diesel-burning truck at some point. As such, it is perhaps not surprising that a regression of real GDP vs. on-highway diesel demand over 23-years of data yields an r-squared of 0.995. As much as we all might like this to change, the United States' infrastructure is such that trucking is likely to remain the main mode of industrial transportation in this country for a very long time.
With fixed costs of nearly $1B/yr (rent, labor, G&A, etc.), TA exhibits a high degree of operating leverage. Given the high operating leverage and correlation to the macroeconomy, as shown in Figure 2 below, even a moderate return to normal economic conditions would cause TA to become reasonably profitable. Therefore, "normalized" EBIT of about $50mm/year seems reasonable.
Figure 2: TA Normalized Earnings
|Total Fuel Sales (Gallons)||1,856||2,037|
|Avg. Crude Price (WTI Spot)||$ 57.23||$ 80.00|
|Implied Price Per Gallon||$ 1.92||
|Total Fuel Sales ($$)||3,568,230||5,474,636|
|Total Gross Margin||924,345||1,001,803|
|Site Level Expense||601,911||600,000|
|D&A (Maintenance Capex)||42,914||30,000|
Thus, assuming a current EV of $84mm (market cap of $64mm + capitalized leases and deferred rent of $177mm - excess cash of $150mm) TA currently trades at about 2.5x normalized NOPAT, which implies an equity value of approximately $15-$20/share or 4x-5x the current stock price, using a 10% cost of capital and backing out the liabilities and nonoperating assets (as shown below).
Figure 3: Earnings Power Value
|EV (perpetuity value of NOPAT at 10% cost of capital)||335,000|
|+ Excess Cash||150,000|
|+ Non-Operating Assets (raw land & equity holdings)||40,000|
|- Cap Leases||102,000|
|- Deferred Rent ($75mm as of last quarter)||90,000|
|- Working Capital Increase (2% of incremental sales)||40,000|
|= Equity value||293,000|
|Value per share||≈ 17.50/share|
Other key valuation assumptions include:
Furthermore, TA has almost no liquidity risk, making it difficult to see how you lose here. TA has minimal covenants on its credit facility, ample liquidity ($185mm of cash on the books and another $40mm+ in available credit and assets sale allowances) and a landlord that has proven willing to be constructive. TA's landlord, Hospitality Properties Trust (HPT), has allowed TA to defer rent payments up to $5mm per month through the end of 2010. This rent deferment is not motivated by altruism. HPT took its pound of flesh in the form of 1.5mm common shares and a 12% interest rate after 2009. More important, however, since TA represents over 30% of HPT's operating income and over 40% of HPT's assets, TA's landlord will clearly do whatever is necessary to keep its tenant solvent.
TA has well-documented corporate governance issues regarding the company's relationship with HPT and REIT Management. On January 31, 2007, HPT purchased TA for about $1.9B. Subsequently, TA entered into a lease agreement with HPT for nearly all the company's properties and TA was spun off to shareholders. At the same time, TA entered into an agreement with REIT Management under which REIT Management would provide "services" in exchange for 0.6% of gross fuel profit and 0.6% of nonfuel sales. Currently this is about $9mm/year. REIT Management has a similar relationship with HPT and several other REITs once affiliated with HRPT Properties.
TA's CFO and CEO are also employees of REIT Management. The CEO used to work at HPT, and TA's chairman, Barry Portnoy, is the majority owner of REIT Management. As such, while TA's current relationship with HPT/REIT Management is not overly concerning - what these relationships could lead to is a serious issue. As natey1015 pointed out in a response to the last TA write-up: "The other main question is where is management's bread really being buttered? ... we know that Reit management gets management fees from HPT based on assets managed. So the bottom line is that it is in Reit management's best interest for TA to grow the number of sites even if the returns are not sufficient because Reit management gets paid twice on that"
Clearly this is not an ideal situation, but there are several reasons I think you're going to be OK here:
The bottom line is that these corporate governance issues probably mean that once the company has paid off its liabilities, $1 on TA's books may be slightly less than $1 to a shareholder - I don't like it either, but you're getting in cheaply enough that you can live with it.
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