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Macro Economics
TravelCenters of America Analysis

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By PosFCF
February 1, 2010

Posts selected for this feature rarely stand alone. They are usually a part of an ongoing thread, and are out of context when presented here. The material should be read in that light. How are these posts selected? Click here to find out and nominate a post yourself!

Some have written and asked me why I chose TravelCenters of America LLC (TA) for my 2010 METAR contest selection. To those folks I wrote back and said that I didn't want to share the entirety of my analysis because then it might not be so effective going forward.

However, given the recent price drop back to levels where I purchased it, I thought I'd at least point out a few things that might be of interest.

The reader should keep in mind that I personally own a decent number of shares of this company and thus my motives for writing this might be purely self-interest. Thus the reader should view any information with a high degree of skepticism and do their own due diligence. The reader should also keep in mind that the poster is an unabashed, dyed-in-the-wool redneck and thus totally incapable of having anything meaningful to say about anything related to investing on a public forum.

Having said all of that I draw the reader to the Yahoo Finance "key statistics" page for TA where I note several things that might be of interest:
http://finance.yahoo.com/q/ks?s=TA

Reading from the top we see that Price-to-Sales is .02, and Price-to-book value is .22 (later listing the book value at $21.50/share). Roughly translated, that means that the current price of the stock is about one fifth of its book value and selling for a price to sales multiple that is almost non-existent. Some might say those levels offer a margin of safety.

In fairness the listed data also indicates the company has a negative enterprise value, negative return on assets and negative return on equity. So perhaps this company really is the dog the market valuation suggests it is. Or perhaps we can evaluate some other data points before addressing those metrics.

I would like to draw the reader's attention to three other data points: total cash of $185.3 million, total debt of $101.85 million (these are listed near the bottom of the left-hand column of data, and that they have 16.67 million shares outstanding (shown low in the right-hand column).

I noticed that if I subtracted debt from cash, I got that they had $83.45 million left after (theoretically) paying off their debt. Then I divided that number by the number of shares to see how much net cash per share they had. That informed me that the net cash was $5.01/share.

The current price is about $4.70/share,

So this old redneck looks at this and asks: "So, let me see if I got this right. I can buy a net of $5.01/share cash for $4.70? AND I get the whole company's business model for free?"

mmmmmmmmm.....what's wrong with this picture?

Now it is true that they are operating currently at a loss. But, when I dig into the numbers one of the things I see is that they continue to spend large amounts on capital equipment. That is one my favorite-est areas to see companies spend money on. I look at it as though they are spending to improve the factors of revenue production. Someday this recession will end and the investments made today will be ready to seize the moment. If things continue to be tough, they can always slow down this area or cut it out completely for a while to conserve cash.

This company was spun off from the parent about 3 years ago, so there's not much history to go on. I've listened to the management earnings conference calls and they seem like they are reasonable business men.

Therefore I'm willing to take a wait-and-see attitude toward the management effectiveness ratios mentioned above. I don't expect to find deeply discounted value propositions that don't have warts.

This company operates truck stops on interstates. That is a business model just about as old as interstates themselves. I think the access is limited. I also believe that no matter how high gas prices may go in the future, there will always be truckers using interstates. Thus there will be business available for this company.

They do have a lot of interconnected business relationships, and one would do well to keep an eye on that aspect to ensure that the profits aren't just going to the insiders, but one would be prudent to do that with all companies. So far, the rates paid to these interconnected enterprises seem fair to me.

In a nutshell then, it seemed as though I could pick up a viable business model for a net of next to nothing. When Mr Market will recognize that perhaps the company should be valued for at least the book value of its assets, or perhaps even more, I don't know. I'm usually way early on these things.

I just have a deep conviction that if I can buy decent business models at a discount to their real value then, over time, the market eventually values them at less of a discount (perhaps even at a premium) and I can then be rewarded for my initial courage of buying something with warts and my patience in waiting until the market begins to say: "Those aren't warts, they're beauty marks!"

Poz
(who decided to do this to celebrate his 5,000th post)