Two Small-Cap Bets as Road Travel Shifts Back into High Gear

Americans are back on the road again, thanks to an improving economy and gas prices that are no longer burning holes in motorists' pockets. With road travel shifting back into high gear, here are two potential opportunities for investing in small-cap operators of gas stations and convenience stores.

One way to go could be TravelCenters of America (NYSE: TA  ) . Based in Westlake, OH, this company is currently acquiring gas stations with convenience stores at 28 locations in Kentucky and three in Tennessee, all under the Minit Mart banner. These acquisitions add to TravelCenters' 247 full-service travel centers at locations in 42 US states and in Canada, operated under the TA and Petro brands. 

CST Brands (NYSE: CST  ) is another play in the retail segment of fuel stations and convenience stores. Based in San Antonio, TX, CST Brands not only has a bigger footprint than TravelCenters, but is also expanding its market presence. In the first nine months of 2013, the company opened at 15 "new to industry," or NTI, locations in the U.S. and three in Canada, and CST plans to double its NTI openings next year. As of last April, the company's retail outlets totaled 1,032 sites in the Southwest and Central U.S., plus 848 retail locations in Eastern Canada.

Toward long-term shareholder value creation
CST Brands was a former unit of Valero Energy (NYSE: VLO  ) , which spun off the retail arm just last May. Its separation from the rest of Valero's operations was aimed at creating operational flexibility and better focus for both businesses' industry-specific strategies.

Notably, Valero continues to pursue this tactic aimed at delivering long-term shareholder value by unlocking the potential value of its assets. The company is now planning to spin off its logistics and transportation business into a master limited partnership following the completion of its retail spinoff.

Strong start as stand-alone business
As a separate enterprise, CST Brands has displayed strength. In the 2013 third quarter, it posted $41 million net income, or $0.55 diluted EPS. Excluding $2 million noncash after-tax impairment charges, $43 million or $0.57 per share would've been realized. A year earlier, the company had a $24 million in net income, or $0.31 diluted EPS.

Upward momentum
TravelCenters likewise delivered solid third quarter results. Its EBITDAR (earnings before interest, taxes, depreciation, amortization and rent) for the period rose by about $4.2 million, or 5.1%, to $87.8 million. Compare this to the company's year-ago EBITDAR of $83.6 million.

EPS for the most recent quarter amounted to $0.53. This was down from $0.66 last year, but ahead of the analysts' consensus estimate of $0.44. Since the release of these results, TravelCenters' share price has been trending toward its 52-week high of $12.50.

Enticing valuations, margins
Buy-and-hold investors may be enticed by the current valuations of the two retailers. The one-year forward P/E ratio is below 10 for TravelCenters and about 15 for CST Brands.

Earnings growth will be fostered by both companies' healthy gross margin on fuel sales. CST Brands' gross margin for motor fuel sales in the U.S. was $0.16 per gallon during the 2013 third quarter, compared to the $0.09 a year earlier.  At TravelCenters, the fuel gross margin for the same comparative period was even better at $0.176 versus $0.166. 

Gourmet dining at gas stations
Investors can also pin their hopes on these companies further improving their fortunes by riding the growing popularity of gourmet gas stations. What may be helping propel this trend is the increasing market presence of consumers from Latin America who bring in the perception from their countries that street food is often great food.

TravelCenters, with its TA and Petro brands, is well-positioned to profit from this shift in consumer attitude. TA's food service business consists of 221 table-service and 297 quick-service restaurants, including franchises of popular fast food chains. TA and Petro's full service stations are favorites of truck drivers, voting these brands as best in 34 of 39 categories in a 2012 national survey.  Expanded market coverage is also in the works with the company's recent Minit Mart acquisitions.

For its part, CST Brands operates a non-fuel business that includes convenience-type merchandise such as beer, tobacco, and beverages. It also recently focused on food service and private-label programs to drive improvement in its merchandise margins. Additionally, the NTIs that the company is launching have larger formats that are conducive to food services.

Foolish recap
Prospects appear generally bullish for gas stations doubling as convenience stores. The fuels and merchandise that they sell are essential to the American lifestyle that has again become more mobile. Watching how the recent expansion initiatives of TravelCenters and CST Brands will pan out, particularly on food service as earnings catalysts, should help value investors uncover a solid stock pick.

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