Monday, February 1, 2010

TravelCenters Of America: It's Complicated

Across several value metrics, TravelCenters of America (TA) appears to have potential as a value investment. While the company trades for just $85 million, it holds $185 million worth of cash and trades at a price to tangible book value of about .25. However, a slew of factors combine to make the outlook for this company highly uncertain, even for the most long-term of investors.

First of all, the company operates in an intensely competitive industry, primarily offering diesel and other services aimed at truckers traveling the highways. Like The Pantry (PTRY), which we discussed last week, it makes slim margins on its petrol products, often entering into price wars with the competition. Recently, one of its competitors entered bankruptcy and was bought out by another competitor, which now has a much stronger competitive position.

While one might argue that TA's locations along prime highway junctions act as a competitive advantage, such advantages are but temporary in nature: TA does not own it's own locations, but rather rents them. As such, the landowner is free to kick TA to the curb if it's not willing to pay market prices for its locations. As such, it is imperative in this industry to be a low-cost operator. Unfortunately, many of TA's major competitors are private companies, making it difficult to determine how well TA is positioned to defend its market.

Furthermore, management's incentives are not entirely clear. Not only does management not own a significant stake in TA relative to what it makes from TA in bonus and salary, but management also has heavy involvement in TA's landlord and a company that does servicing work for TA. For example, TA's CEO and CFO are both executives of TA's servicing company. Management also has ownership stakes in these related companies.

Finally, for those more interested in an asset play than an earnings power outlook, the company's balance sheet is not nearly as pristine as it appears. A great majority of the cash is earmarked to pay back huge rent liabilities that are over and above the company's stated debt. The company has been recognizing rent expenses on the income statement over the last little while, but hasn't been paying much of that rent as of yet! This has made the balance sheet look temporarily better than it deserves to be, as these deferrals are not likely to continue, resulting in a cash outlay to cover these liabilities.

For further discussion of this company's risk factors and potential, see the articles at Variant Perception here.

Disclosure: None


Steven Dall said...

i thought that book value equals totals assets - total liabilities ..have you discovered any off-balance sheet liabilities??

Anonymous said...

Your article is riddled with inaccuracies, the most notable of which is, "The company has been recognizing rent expenses on the income statement over the last little while, but hasn't actually been paying any rent!" Saying the Company hasn't been paying any rent is completely wrong. The company has actually paid the majority of the rent due under their leases. You should check your facts.

Saj Karsan said...

Hi Steven,

Yes, I have assets minus liabilities at around $350 you have something else?

Hi Anon,

You are right, "hasn't actually been paying any rent" is an overly sweeping statement. I have corrected that line, but the point remains that they have major rent liabilities coming due which makes the cash position not as good as it would otherwise look.

Anonymous said...

Hi Anon, They do pay some rent, but they also have been deferring $5M in rent per month since July 2008. That unpaid rent balance also started accruing interest charges of 12% per annum on January 1, 2010. So by my count that equates to a $95M off-balance sheet liability to Feb 1.