If you were to go out and buy a business in its entirety, what qualities would you look for? Something glamorous and sexy, like a sports team, right? No, of course not -- the fact that you're even still reading about stocks these days is a clear sign you're not in it for the cool points.
You approach investing in a business-like manner, so you'd look for a company with recurring revenue, low needs for additional capital, good growth potential, and a competitive advantage that allows you to earn profits in good times and bad.
One such business, as Warren Buffett is famous for noting, is the toll booth. But another similar, and also car-related business, is the parking lot. Parking lot operators don't have the monopoly power of a toll booth, but within any given urban community, parking lots have characteristics of an oligopoly, where all players can earn a decent profit. It's a good business, and that's why I'm interested in tiny Imperial Parking (AMEX: IPK). Some Fools will recognize this company from Whitney Tilson's past writings. (It continues to be one of his favorite holdings.)
Founded in 1962, Imperial Parking is Canada's largest parking operator and the third-largest in North America, behind APCOA/Standard and leader Central Parking (NYSE: CPC). Impark, as the company is known, has over 1,600 parking facilities, representing over 300,000 parking spaces. Central Parking, by way of comparison, operates approximately 4,000 facilities.
One reason I'm attracted to Impark is that its stock is strikingly cheap. At a recent price of $23, the stock trades at only eight times trailing free cash flow-per-share of $2.91. Plus, with $13.7 million in cash and only $3.8 million in debt, there's $5.44 per share in net cash. On an enterprise value-to-sales basis, the stock is at a multiple of only 0.35, versus a multiple of 1.40 for Central Parking. Are Central Parking's sales really worth four times as much as those of Imperial Parking? No way.
Impark is so cheap is because it's tiny and illiquid, and therefore relatively unknown. The company only has 1.819 million shares outstanding, and average volume is barely over a thousand shares a day. Daily dollar volume on the stock is a sparse $27,000, not even close to the $1 million-to-$25 million range typically considered optimal for Foolish 8 growth stocks.
And yet in spite of Impark's illiquidity, the stock has been anything but volatile. Over the past year, the share price has ranged from a low of $21.70 up to $27.25. Impark stock was at that $27 high as recently as May, but has come down of late for no apparent reason, other than the market's demise. Given that this is a stable, defensive business with no technology risk whatsoever, I think the market may be offering an interesting opportunity at the current price.
Over the past year, Impark has earned revenues of $94.6 million, up 32.7% over the year prior. This growth is primarily due to acquisitions. The largest acquisition this past year came in July 2001, when Impark acquired DLC Management Group, the third-largest operator in Philadelphia and a leader in hospital parking. This acquisition is consistent with management's goal of expanding into major U.S. markets at a pace of two-to-three per year. Some other U.S. cities on Impark's radar are Dallas, Denver, Houston, Los Angeles, and Boston.
In addition to geographic expansion, Impark is looking to further expand its revenue and profitability by leasing more of its parking facilities. Right now, only 34% of Impark's parking facilities are leased, while the majority (65%) are operated under management contracts. Under the management contract form of operation, Impark manages a parking lot for a fee, paid by the parking lot owner. The upside of this arrangement is that Impark doesn't have to make a capital investment to actually own the lot, but the downside is that Impark doesn't get the parking lot's full revenue potential.
In order to capture a parking lot's full economic potential, Impark either needs to lease or own the facility. The advantage of leasing over owning is that leasing doesn't require quite as high of an initial capital investment. Given the mix of pros and cons, Impark's goal is to eventually have a 50:50 split between management contracts and leases.
Behind Impark's operating strategy is a management team with over 55 years of combined experience in the parking industry. CEO Charles Huntzinger, 54, came from Central Parking, where he ran its New York City parking operations. COO Bryan Wallner, 42, is also a grad of Central Parking, where he was responsible for its Midwest operations. Finally, CFO Bruce Newsome, 52, has been at the helm of Impark's finances (as either CFO or controller) since 1983. This team is old enough to have the advantages of experience, but young enough to aggressively pursue the company's expansion goals.
Overseeing the management team is a board of directors with high inside ownership and a strong investor presence. Four of the company's nine directors are professional investors, including Chairman William Ackman, principal of Gotham Partners, who owns 31% of the company. Shareholders can take comfort knowing that a financially savvy board, with plenty of its own skin in the game, is looking out for shareholders' interests. All told, insiders own 48% of Impark.
Interested investors need to tread carefully in considering this stock because it's so thinly traded. But at a price-to-free cash flow multiple of only eight, buyers at the current price are getting a free cash-flow yield of 12.5% (the inverse of eight). That's a sustainable yield, even without growth. And with any luck, Impark's geographic expansion has the potential to grow revenue, while the transition to more leased facilities should improve long-term profitability. Bottom line: It's a good business at a great price -- for once, you might not get towed.
Matt Richey is a senior investment analyst for The Motley Fool. He's glad he doesn't have to personally pay for the exorbitant parking lot rates in Old Town, Alexandria. At the time of publication, he had no position in any of the companies mentioned in this article. Matt's personal portfolio is available for view in his profile. The Motley Fool is investors writing for investors.