Disclosure: I am long TA.
We think TravelCenters of America (TA) is one of the most undervalued stocks in the market. TravelCenters of America is a best of breed player in an oligopoly type of market. TA's PE ratio is under 5, and though the economy has been sluggish and fuel prices have been volatile, TA has delivered eleven straight quarters of year-over-year earnings growth. It trades for less than half of its book value, and the cash on its balance sheet nearly equals its entire market cap. TA is drastically undervalued by many measures.
TravelCenters of America operates and franchises 243 travel centers mostly along the U.S. interstate highway system under the TA and Petro brands. TA caters largely to long haul trucking fleets and their drivers, as well as independent truckers and motorists.
The three most important trends and catalysts for TA are:
1) TravelCenters of America Has Strong Business Fundamentals
- TA's Market is an Oligopoly - There is only one U.S. interstate highway system and the best locations along it are gone, taken by companies earning such high gross margins on nonfuel items there's a name for the practice - highway robbery
- TA is Best of Breed - TravelCenters of America has a head start in upgrading its facilities versus competition, is the hands down favorite of most drivers in the market, and while some competitors couldn't survive the economic slowdown TA's management is delivering regular earnings growth
- TA is Growing - TA is buying independent travel centers hampered by the sluggish economy, it is also expanding its current locations to grow high margin nonfuel revenues
2) TA Has A Valuable Relationship With Its Primary Landlord, Hospitality Properties Trust (HPT)
- HPT Needs a Healthy TA - TA is HPT's largest tenant, HPT needs a healthy TA and has proven to be a powerful ally
- HPT Gives TA Competitive Advantages - TA is the best of breed player largely because of what HPT provides: irreplaceable locations, capital for expansion, a financial lifeline, insurance, and excellent management
- Management is Acting in TA's Best Interest - TA is so undervalued because of the fear that management will operate in an unfair way, favoring HPT. Conspiracy theories persist, but this is wrong for a number of reasons including self interest and fear of litigation. Not only that, but TA is realizing significant acquisition opportunities because management is eager to show its dedication to an independent and autonomous TA.
3) Value
- The Fourth Quarter - The days of fourth quarter losses should be over as TA looks to be profitable for the first time in Q4
- Comparisons - By many measures, TA trades at a deep discount to peers and the broad market
- All This In a Sluggish Economy - TA is growing earnings in a slow economy and will really flourish in an economic upturn
Let's look at these three trends and catalysts in depth.
1) TA Has Strong Business Fundamentals
TA's Market is an Oligopoly
The U.S. railroads are a famously good business because there is only one railway system - send something by train and there is no alternative to the rail company's tracks. The same goes for the U.S. interstate highway system - send something by truck and there is no alternative to the interstate highway system, and the travel centers along the way.
Interstate travel centers developed along with the highway system over the decades, and the best locations were claimed years ago. This is an advantage to the three major entrenched players, as not only are the best locations long gone, but suitable new ones are difficult to find. Travel centers need to be large enough to accommodate truck traffic, they also need substantial power, water, and sewage utilities. In addition, travel centers need proper zoning. Decades of environmental regulations, restricted truck access laws, no idle zones, and noise rules from governments at all levels have made zoning a new fuel station increasingly more difficult and costly. There are significant barriers to entry in this market.
So the entrenched centers have a moat of protection from new competition. This means a profitable travel center can stay profitable for a long time. It also means the pricing power of "highway robbery." Interstate travel centers can charge high prices because of the lack of competition. Indeed, in the most recent quarter, TravelCenters of America's cost of nonfuel goods sold was $164 million, while its nonfuel revenue was $363 million. That's a cool 120% mark-up on snacks and tires, just for being the middle man.
And not only does TravelCenters of America operate in a market that provides pricing power and protection from new competition - it is taking market share.
The economy has been sluggish for half of a decade now, and while TA is delivering a healthy profit, the small players are having a hard time competing. In the third quarter, TA bought five more independent travel centers and agreed to buy three more in October. Its total stands at243, a significant addition to the 185 centers it has leased with HPT. What's better than operating in an oligopoly? Operating in an oligopolyand taking market share.
Let's see how TravelCenters of America stacks up against the other major players in this market.
TA is Best of Breed
We believe we possess a number of competitive strengths that enable us to be a leader in our industry and may enable us to enhance this leadership position in the future. We believe these competitive strengths include our broad geographic footprint, our large average travel center size, the wide array of customer services and amenities we offer, our truck repair service business, which offers a wide variety of repair and maintenance services at substantially all of our travel centers, and our large variety of restaurant choices.(recent 424B5 filing found here)
There were four major players in the interstate travel centers business until 2010, when bankrupt Flying J merged with Pilot. The combined Pilot Flying J is the now the largest operator with 656 locations, followed by Love's with 290, and TravelCenters of America with 243. Both Pilot Flying J and Love's are privately held.
TravelCenters of America was spun off from Hospitality Properties Trust in 2007 so that HPT could stay structured as a REIT. TA entered into 15-year leases to rent a total of 185 travel centers from HPT, then set about upgrading the facilities with HPT's help. HPT, needing a healthy tenant that could pay rent, financed TA's capital expenditures for several years. The result is today's TravelCenters of America, a very profitable company whose facilities and services are preferred over its competitors by a wide margin.
Truck fuel and maintenance costs a lot of money. Creating loyalty with drivers who prefer your centers can be a lucrative endeavor. Neither Pilot Flying J nor Love's has the parent company support of a firm like HPT, and their services have suffered by comparison. In Flying J's case, it teetered on bankruptcy for several years before merging with Pilot - it never had the capital to update its centers.
TravelCenters of America is the hands down favorite amongst truck drivers across a wide range of services:
(click to enlarge)
TA has the best of everything a driver needs. The preferred homestyle cooking, fastest fueling times, mechanics trusted like family, 5,000 item travel stores, and then there's the parking. TravelCenters of America has the most paved truck parking spots in the business, with up to 500 per location. This is especially important now because the economic boom leading up to the recession put a lot of trucks on the road. Government cutbacks are now closing public rest centers and trucks are running out of places to park. TA has the most spots and even rolled out a parking reservation system so drivers can reserve ahead via their mobile devices.
TA has also outfitted virtually all of its locations with diesel exhaust fluid pumps for new cleaner diesel engines, and recently signed a memorandum of understanding with Royal Dutch Shell (RDS.A) that "Shell will construct and TA will operate at least 200 natural gas fueling lanes on at least 100 TA locations." TA's first in class truck facilities make it a natural selection for Shell and the natural gas highway. TA is dominating the present and preparing for the future.
While Flying J and many independent travel centers couldn't outlast the recession, TA's management built it into the leading brand in the oligopoly. And TA is growing. Let's look at its growth strategy.
TA is Growing
We believe that the U.S. economy is in a period of slow and uneven recovery and expansion. We also believe that many smaller travel center owners are finding it difficult to access capital for acquisition, refinancing and improvements and further that these conditions have afforded, and may continue to afford, us with opportunities to acquire and renovate existing travel centers for less than their replacement cost. We have acquired or agreed to acquire 22 travel center properties for an aggregate purchase price of $99.9 million during 2011 and 2012(recent 424B5 filing)
Independent travel centers have to do their own accounting, planning, and marketing at relatively high costs. When TA buys a travel center some of these costs become virtually nil - the new center falls under TA's existing umbrella of services, with the costs spread over hundreds of centers.
Independent travel centers have struggled without the economies of scale and prudent management that TA enjoys, and TA has bought them. TA has grown to 243 locations in the slowdown, and per the Q3 conference call management projects 10-15 more acquisitions in 2013.
TA is growing through acquisitions, it is also growing by upgrading and expanding its existing locations.
TA has synergy between its revenue streams, and its business is a case study in the up-sell. Come for the fuel, stay for a meal. Get that routine maintenance done on the truck while you eat, then step over to the Verizon (VZ) store to get a wireless device for your route. Visit the travel store for road toiletries and a bottle of a water, then grab a coffee from Starbucks (SBUX) and get back on the road, we'll see you in another 400 miles.
While trucks guzzle fuel and fuel sales make up most of TA's revenues, it is the nonfuel sales that make up most of TA's profit. In the most recent quarter, fuel sales made up 82% of TA's $2 billion revenues, but nonfuel sales made up 69% of its of $288 million gross margin.
TA has been upgrading and expanding its locations to increase these nonfuel offerings, and it is hitting the bottom line. The last eleven quarters of year-over-year EBITAR growth for TA is a direct result of having eleven quarters of year-over-year nonfuel gross margin growth. This is a very strong trend. TA's fuel sales volumes have had up and down quarters over the last three years, but even when trucks were fueling less, as in the most recent quarter, nonfuel earnings kept growing.
TravelCenters of America is the best of breed player in an oligopoly, and is growing earnings and taking market share.
Let's look at HPT.
2) TA Has A Valuable Relationship With HPT
"We believe that our agreements with HPT, RMR and AIC are on commercially reasonable terms. We also believe that our relationships with HPT, RMR, AIC and their affiliated and related persons and entities benefit us, and, in fact, provide us with competitive advantages in operating and growing our business."(From the Q3 10-Q)
HPT Needs TA
TA was born in 2007 when deep-pocketed REIT Hospitality Properties Trust bought a number of interstate travel locations and spun off TA as the operating company. HPT remains TA's largest shareholder, and TA's lineage means it was born with something of a silver spoon in its mouth. As a REIT, HPT needs healthy tenants to pay rents, and HPT financially supported TA in upgrading its facilities into the best in the market. HPT needed a healthy tenant.
Though HPT owns a number of hotels, TA is HPT's largest tenant, leasing 39% of HPT's properties. HPT needs TA to keep paying rent, that's why it financed TA's upgrades, and that's why HPT is a valuable ally for TA.
HPT Gives TA Competitive Advantages
TA gets competitive advantages from its relationship with HPT including irreplaceable locations, capital for expansion, a financial lifeline, insurance, and excellent management.
Irreplaceable Locations - The best interstate locations are gone, and suitable new ones are hard to find. HPT's locations are proven and profitable for TA - and there is no replacement landlord in the market.
Capital For Expansion - TA got a loan of $150 million, in the form of interest-free deferred rent due at the end of the leases, from HPT as it was building up to profitability. TA would be fine now without any additional help from HPT. But the economy is weak, the competition is vulnerable, and TA is young. The time is right to expand, and with HPT's help TA is doing so aggressively. In the first nine months of 2012 TA had $112 million in capital expenditures, upgrading centers and acquiring competitors. It did this partially with the support of HPT, which buys TA's upgrades of HPT's locations, allowing TA capital to buy additional travel centers independent of HPT.
During the nine months ended September 30, 2012, pursuant to the terms of the HPT Leases, we sold to HPT $48,282 of improvements we previously made to properties leased from HPT(From the Q3 10-Q)
So TA's relationship with HPT is allowing it to expand at the right time. It also provides a bit of protection from an economic shock.
A Financial Lifeline - TA's business is a cyclical one. Trucking is linked directly to the economy. If the economy were to really take off, TravelCenters of America's earnings would soar.
That is one criticism of TA's industry, that it is economically sensitive. TA has done very well in the downturn, is quite profitable, and has plenty of cash. But if there were a big economic shock and trucking really stalled, TA would be hurt, and over a long enough period of time could need financing. In this case HPT would have an interest in supporting TA until the economy got better. TA is the best tenant in the market for these locations, and HPT needs a healthy, rent-paying tenant.
So while TA's business is directly levered to the upside of an economic recovery, it also has something of a financial backstop with HPT in the wings.
Insurance - Travel centers need a lot of insurance. Instead of buying insurance retail, TA participates in Affiliates Insurance Company (AIC) as part of its relationship with HPT:
we expect that we may benefit financially by possibly reducing our insurance expenses or by realizing our pro-rata share of any profits of this insurance business(From the Q3 10-Q)
Excellent Management - TA's management is rooted in HPT's management, and management is executing expertly. TA is the best player in the space, taking market share and consistently growing earnings in a sluggish economy.
HPT provides TA with competitive advantages in operating and growing its business because HPT needs a healthy tenant in TA.
Management is Acting in TA's Best Interest
TA is so undervalued because of the fear that management will operate in an unfair way, favoring HPT. But in our opinion, TA's management is acting in TA's shareholders best interest. Not only that, but TA is realizing significant acquisition opportunities because management is eager to show its dedication to an independent and autonomous TA. Management is reluctant to give even the appearance of wrong-doing following several years of litigation.
Conspiracy theories persist about Barry Portnoy. Barry Portnoy is a Managing Director of TA, a Managing Trustee and the largest shareholder of HPT, and the majority owner of REIT Management & Research. Both TA and HPT have management agreements with RMR:
Reit Management & Research LLC, or RMR, provides business management and shared services to us pursuant to a business management and shared services agreement, or our business management agreement. RMR also provides building management services to us for our headquarters building pursuant to a property management agreement. Under our business management agreement with RMR, we acknowledge that RMR also provides management services to other companies, including HPT. One of our Managing Directors, Mr. Barry Portnoy, is Chairman, majority owner and an employee of RMR.
(Quote From the Q3 10-Q. TA's Business Management and Shared Services Agreement with RMR can be found here)
TA's management comes from its primary landlord HPT and its related interests. While this arrangement has been very beneficial for TA, it may also be seen as a conflict of interest. The perception that TA will not be managed fairly because of this relationship is the reason TA is discounted so heavily.
In 2008, soon after TA was spun off from HPT, a TA shareholder sued Barry Portnoy and other individuals as well as HPT and TA. The major contention was that the leases that TA and HPT signed were too one-sided in favor of HPT. Litigation dragged on until 2011, when reductions in rent were agreed upon.
The terms of the Amendment Agreement described above were negotiated and approved by special committees of our Independent Directors and HPT's independent trustees, none of whom are directors or trustees of the other company. Each special committee was represented by separate counsel.
Given that HPT's properties are irreplaceable, HPT gave TA nine-figure financing for expansion, the resultant TA is so profitable, the properties were bought by HPT and leased by TA at the height of the real estate bubble, and the costs of litigation drive incentive to settle, it is not clear whether there was indeed gouging when those leases were drafted.
Since that time, though, it seems clear that not only has management acted in TA's best interest, it has taken steps to create a more independent TA and avoid even the appearance of impropriety.
This is a buyer's market and TA has expanded its earnings for eleven quarters in a row partly because of the bargain acquisitions it is making. HPT, as a REIT that owns travel centers, has incentive to buy those centers itself. As HPT is financing so much of TA's development, it is only fair that TA should not then go and spend its own money doing acquisitions that HPT would like to do. This is a term of their leases: HPT has the right to buy any third party travel center property before TA does.
However, as TA's locations increased to 243, and as HPT funded TA's growth, the number of centers owned by HPT increased by exactly zero. We believe that HPT would like to be the owner of these centers, fairly negotiated the right to buy them, and is allowing TA to buy them so as to avoid accusations of impropriety and demonstrate a commitment to an independent and autonomous TA.
Barry Portnoy and four others were named as individual defendants in that 2008 lawsuit. Three years of legal problems is bad for already rich individuals, bad for HPT shareholders, and bad for TA shareholders. It seems that management is taking steps to manage not just business, but appearances.
ALTHOUGH WE BELIEVE THAT WE BENEFIT FROM OUR CONTINUING RELATIONSHIPS WITH HPT, RMR AND THEIR AFFILIATED AND RELATED PERSONS AND ENTITIES, ACTUAL AND POTENTIAL CONFLICTS OF INTEREST WITH OUR MANAGING DIRECTORS, HPT, RMR, AIC AND THEIR AFFILIATED AND RELATED PERSONS AND ENTITIES MAY PRESENT A CONTRARY PERCEPTION OR RESULT IN LITIGATION(From the Q3 10-Q)
The Leases Are Fair
HPT earns money from TA's rent payments. Some fear that HPT will try to somehow bleed TA dry through its leases - this is wrong. Management is under heavy scrutiny, fearful of further litigation, and unlikely to think it can change the outcome of its three year court battle. Furthermore, HPT will receive almost $200 million in rent in 2012 from TA. As a REIT, HPT pays a dividend, and TA's rent roughly covers HPT's entire dividend - last year HPT paid about $225 million in dividends (123 million shares X $1.82). Both TA and HPT benefit greatly from the leases as they stand, and have an existential interest in maintaining the agreed upon arrangement.
TA's leases with HPT don't expire until 2022 and 2024, and cannot be easily changed. They are fair and include no increases except for (A)improvements done by TA on HPT's property and sold to HPT at an 8.5% capitalization rate, a normal rate for specialty real estate, and (B)percentage rent increases in sales over base numbers.
Under the HPT Leases, we may request that HPT purchase approved amounts for renovations, improvements and equipment at the leased travel centers, in return for annual rent increases according to the following formula: the rent per year will be increased by an amount equal to the amount paid by HPT multiplied by the greater of (I) 8.5% or (ii) a benchmark U.S. Treasury interest rate plus 3.5%.
TA is under no obligation to sell improvements and HPT is under no obligation to buy, but it generally makes sense, provides TA with cash for independent acquisitions, and has a built in fair value mechanism - if HPT underpays TA when buying, then TA's rents will be lower. TA's rents can only be high if HPT overpays TA for the upgrades in the first place.
The percentage increases are fair as well:
equal to 3% of increases in non-fuel gross revenues and 0.3% of increases in gross fuel revenues at each leased travel center over the respective gross revenue amounts for the year 2011. The Petro lease requires the same percentage rent payments, except that such payments start in 2013 and are calculated using the revenues of the 40 Petro travel centers in excess of revenues for the year 2012. Percentage rent attributable to fuel sales in each lease is subject to a maximum each year calculated by reference to changes in the consumer price index.
As HPT was fundamental to TA's development, these small percentages of growth above healthy baselines, only on the original 185 centers, and including a ceiling, are very fair and not unusual for REITs and tenants. These increases have indeed been reasonable:
The percentage rent is paid to HPT quarterly in arrears. The total amount of this percentage rent recognized as expense during the three and nine months ended September 30, 2012 was $222 and $1,277, respectively.
So what is TA worth?
3) Value
The Fourth Quarter
we suffered only temporary closures of 9 sites, all of which were reopened by November 1.(CEO Thomas O'Brien on the Q3 Conference Call)
Sandy did not derail TA's fourth quarter, and we think Q4 will make a bit of history for TA.
TA's business changes with the seasons. The first quarter is a loss in the thick of winter, the second quarter thaw is TA's best period as pent-up demand from winter hits the roads. The third quarter is healthy as good driving conditions overlap with Summer travel.
Then there is the fourth quarter, a loss in every year of TA's existence - until now. TA has grown year-over-year EBITDAR for 11 straight quarters, and we think its days of fourth quarter losses are over.
Analysts predicted a 40 cents per share loss last year in the fourth quarter - TA's loss was 9 cents. This year analysts project a loss of 11 cents a share. Let's put together our own income statement and see what the fourth quarter 2012 looks like. We'll get all of our information from TA's Annual Report and 10-Qs as well as the Q3 conference call.
For comparison, here is the income statement from the Q3 2012:
(click to enlarge)
Fuel Volume - Last year in Q4, TA sold 474 million gallons of fuel (1,951 annual - 1,477 first three quarters), so we'll start with that as a base for this year.
In the first two quarters of this year fuel volumes were down 1.85% from 2011. Q3 volumes were down 6.8% year-over-year. The most recent quarter had extenuating circumstances though - per the conference call7% of pumps were out of service (compared to 1.4% in Q3 2011) due to diesel exhaust fluid and high speed pump installations. These installations should be completed in the fourth quarter, so there should be a period of time in Q4 with no outages due to installations. TA's branding campaign is also expected to be virtually completed in the fourth quarter, leaving just 2 centers selling gasoline without a major brand. This is expected to have a positive impact on volumes and margins, and TA rolled out its parking reservation system in Q4. Traffic should improve incrementally from Q3.
Let's be conservative, and say that Q4 fuel volumes will be down 5% from Q4 2011, that's 474,490 - (474,490 X .05) = 450,766 gallons.
Fuel Price - Prices at the pump are famous for rising fast and falling slow. Fuel stations are quick to pass higher costs on to consumers, but generally wait until competition forces their hand to lower prices when costs fall. This is why margins are generally tighter as fuel costs rise and widen as fuel costs fall. Thus Q2 of 2012 looked good for fuel margins, but Q3 looked challenging:
(WTI Crude Oil Spot Prices, click to enlarge)
TA had 6% gross margins on fuel in Q2, an excellent number, but it also managed 5.4% gross margins in Q3, when things were tough. Historically margins should have been between 4% and 5%. Here is what CEO Thomas O'Brien says about that:
Certainly, the branding on the gasoline side, that's an easy one but it's probably the least important of the 3. I think strategies associated with retail margins or non-discounted, I should say, sales of diesel are, today, is something I think that we are able to implement much faster, much more efficiently with a lot more built-in follow-up and ability to track near instantaneous compliance at the site level, better than we were able to -- or was necessary, frankly, just 3 or 4 years ago. And so I think it's a little bit of strategy, a little bit of paying much closer attention, and a little bit of systems that allow us -- that we've developed over the last couple of years within the company, that allow us to do things more rapidly and with greater accuracy.
We wonder if "consolidation in our oligopolistic industry" is what he meant. Maybe it is strategy and execution, maybe it is less competition - either way those margins have become sticky.
Looking at the chart for Q4, we see that costs looked slightly favorable, falling a little for most of the quarter until an uptick at the end. Let's project fuel gross margins halfway between the cooperative Q2 and difficult Q3, that's 5.7%
Looking at the chart again, we can see that in Q3 and Q4 fuel costs were generally priced about the same between the two quarters. In Q3 TA sold fuel at an average of $3.26 a gallon. If we use that same average price for Q4, along with 450,766 gallons projected to be sold with 5.7% gross margins, we have $1,469,497 in fuel revenue and $1,385,735 in fuel costs:
($1,469,497 - $1,385,735) / $1,469,497 = .057
Revenues:
| |||
Fuel
|
$
|
1,469,497
| |
Nonfuel
| |||
Rent and royalties
| |||
Total revenues
| |||
Cost of goods sold (excluding depreciation):
| |||
Fuel
|
1,385,735
| ||
Nonfuel
| |||
Total cost of goods sold (excluding depreciation)
| |||
Nonfuel
TA's growth strategy has everything to do with expanding its nonfuel offerings, and its nonfuel gross margins have responded with 11 straight quarters of year-over-year growth. As TA has not slowed down upgrading or acquiring centers, this growth should continue.
Last fourth quarter's nonfuel revenues were up 10% from 2010, which were up 7.3% from 2009. The first two quarters of 2012 had 6.9% nonfuel revenue growth, the third quarter grew by 4% even though fuel volumes were down. The average for the first three quarters was 5.9%.
2011's Q4 nonfuel revenue was $307,409, let's use the average growth rate for the first three quarters of 2012 of 5.9% and project nonfuel revenue of: $307,409 X 1.059 = $325,546.
Nonfuel gross margins were 55.5% in Q1 of this year, 55.9% in Q2, and 54.8% in Q3. Last year's Q4 had 56.7% nonfuel gross margins. Let's use the lowest number of 54.8%, and calculate nonfuel costs of $147,146:
($325,546 - $147,146) / $325,546 = .548
Revenue From Rent and Royalties
R&R for Q4 2011 was $3,690. For the first nine months of 2012 R&R is up almost 4.3%, with TA continuing to expand let's go with that 4.3% for Q4: $3,690 X 1.043 = $3,849
So revenues and costs for Q4 look like this:
Revenues:
| |||
Fuel
|
$
|
1,469,497
| |
Nonfuel
|
325,546
| ||
Rent and royalties
|
3,849
| ||
Total revenues
|
1,798,892
| ||
Cost of goods sold (excluding depreciation):
| |||
Fuel
|
1,385,735
| ||
Nonfuel
|
147,146
| ||
Total cost of goods sold (excluding depreciation)
|
1,532,881
| ||
That's a gross margin of $266,011. Let's do the operating expenses.
Site Level Operating
Site level operating expenses were $166,923 in Q4 of 2011. The first nine months of 2012 saw 2.9% growth in site level operating expenses, with the most recent quarter at 2.0%. Let's be conservative and use the higher number:
$166,923 X 1.029 = $171,764
Selling, General & Administrative
SG&A has been very high in the past few quarters because of higher fees related to acquisitions, and also legal bills - lawsuits are endemic to the fuel industry and TA is named as one of many defendants in several lawsuits that have persisted since TA was created. Management does not know if this will abate anytime soon, with the CEO saying it is as likely to be down a little as up a little. The average for the year is $24,370, with the Q3 coming in at $25,577. Let's use the Q3 number.
Real Estate Rent
TA's rent with HPT increases in two circumstances: TA upgrades an HPT property and sells it to HPT at an 8.5% cap rate, and percentage increases in sales over base numbers.
While we don't know the sales numbers for Q4 we can look at rents for this year, the first with the percentage increases in rent, to approximate rent for Q4. Rent for Q1 was $49,515, Q2 was $49,364, and Q3 $49,185. Let's use the highest number for Q4, $49,515.
Depreciation and Amortization
D&A for Q4 2011 was $13,067. The first two quarters of 2012 saw an increase of 7.3% in D&A, with Q3 rising to 9.4%. Let's be conservative and use the higher number: $13,067 X 1.094 = $14,295
So, income from operations looks like this:
(click to enlarge)
That's an operational profit, conservatively calculated, in a perennially losing quarter during a slow economic time. Before those operational profits can be net income, though, we have to account for income from equity investees, acquisition costs, interest income, interest expense, and provision for income taxes. These costs were $6,984 for the first nine months of 2012, up 7.9% from 2011, with Q3's costs being up 7.5% from 2012. Let's calculate 7.9% over Q4 2011's costs of $2,351.
$2,351 X 1.079 = $2,537
So our operational profit of $4,860 less $2,537 is $2,323 in net income. That's a gain of 8 cents per share for the quarter, and $1.29 for the year 2012 (-.49, 1.04, .66, .08).
The average stock in the S&P 500 trades at a PE multiple over 17. If this growing, best of breed oligopoly-player were valued at that average, it would trade for:
$1.29 X 17 = $21.93, for a market cap of $632 million.
TA's last close? $4.95, 3.8 times the $1.29 this company should conservatively earn in 2012, for a market cap of $143 million.
Comparisons
Let's compare TA to some other publicly traded companies. While there are no interstate competitors trading publicly, there are three convenience stores that have comparable businesses: Susser Holdings (SUSS), Casey's General (CASY), and The Pantry (PTRY).
Let's start with earnings per share. We saw that TA earns $1.29 per share.
How about SUSS? It earns $1.99 per share, but those earnings will cost you $36.73 per share, as SUSS's PE is over 18, more than four times TA's.
CASY? You can get $2.90 per share, but it will set you back $53.70 as CASY is valued a little higher than SUSS. If TA had a PE multiple of 18 like SUSS and CASY it would trade at $23.22.
And PTRY? The Pantry earns 33 cents per share, about one quarter of TA's earnings. How much does each share cost to get those 33 cents? $11.69. Whereas TA pays for itself in less than one presidential term, The Pantry takes over 35 years. If TA had a PE multiple of 35 like PTRY it would trade at $45.15.
How about book value? TA trades at .44 book value.
PTRY trades at .84 book value, if TA did it would trade at $9.45.
SUSS is valued at 2.26 book value, that would put TA at $25.42.
CASY's price to book ratio is 4.06. TA would trade at $45.67 if it were equally valued.
Is TA really that much smaller of a company than these three? How about revenue? TA has more revenue than any of them (all revenue and EV/EBITDA numbers from Yahoo finance):
TA: $8.00 billion
PTRY: $7.39 billion
CASY: $6.58 billion
SUSS: $5.72 billion
What about the EV/EBITDA ratio, the preferred metric of many? It's the same story all over again. TA (1.49) trades for about one quarter of the value of SUSS (5.34) and PTRY (5.72), and about one sixth of CASY (8.54). These imply a share price for TA in the teens and 20s if comparably valued.
Our contention is that TA is so undervalued because of the misplaced fear of management favorable to HPT. The fear is misplaced because management is happy with the mutually beneficial arrangement, and fearful of accusations of wrong-doing and further litigation.
Our comparisons project TA's price from $9 all the way up to $45. Are these prices realistic? They should be: the earnings are real, sustainable, and growing. TA's business is exciting now for its pricing power and protection from competition - a robust economy would make its earnings gaudy indeed. Combined with a fair multiple this stock could trade where it did when it came public - before it was profitable!
(click to enlarge)
TA's management has created a growing best of breed player in an enviable oligopoly. It is flourishing, and its best days are yet to come. It is in the best position it has ever been in, and growing stronger and more independent with HPT's support.
TA is a dramatically undervalued stock, one of the most undervalued stocks in the entire market. When fears of unfair play give way to realizations of TA's evolution, this stock will no longer be so undervalued.
By Joe Springer
By Joe Springer
Source : seekingalpha.com
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