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TravelCenters: A Bargain Work In Progress

Posted: Nov 12, 2009 11:36 AM by Sham Gad

Tickers in this Article: LUK, BKC, HPT, AMEX:TA

TravelCenters of America (NYSE:TA) recently reported its third quarter numbers and they continue to be indicative of the challenging economic conditions. For the three months ending September 30, 2009, TA lost some $12.2 million (about 73 cents a share) compared to net profit of $16.6 million or $1.08 a share a year ago.

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Traveling in the Right Direction
TravelCenters offers a very compelling risk reward scenario as long as one has faith that management will continue to operate as effectively as they currently seem to be. TA was spun out of Hospitality Properties Trust (NYSE:HPT) a couple of years ago. TA owns and operates major highway travel centers that offer diesel and gasoline services, restaurants, motels, truck repair, and other service. If you have taken a road trip on a major highway, chances are you've visited a TravelCenter operated site or one run by its largest competitor, privately run Pilot. These travel centers are the huge gas stations that also included restaurants like Burger King (NYSE:BKC), Dairy Queen, or Subway in addition to convenience stores and other services.

No doubt, the travel center business is directly affected by the overall state of the economy, and mainly truck miles driven. The majority of the company's revenues come from fuel sales, a very low margin business, thus making fuel sales volume the key component of profitability. (For more, see Battered Stocks That Bounce Back.)

A Rare Bargain Today
Assuming that there's hope for this business, TA still remains dirt cheap, despite the weak quarter. The current market cap is about $90 million. Cash on the balance sheet is $185 million. While TA has no long term debt, it does have $75 million in deferred rent liabilities as part of an agreement with HPT. Moreso, tangible book value per share is over $20 against a stock price of $5. And TA's assets are very difficult to replicate - prime land on some of the nation's busiest highways. It's no surprise that TA counts as shareholders Leucadia (NYSE:LUK), a conglomerate run by astute investors Ian Cumming and Joe Steinberg.

The Bottom Line: Pay Attention
Despite the weak quarter, management is clearly doing a lot of good things. For the first nine months of this year, SG&A expenses came in at $58 million versus $77 million in 2008. Total operating expenses were down nearly 10%, from $770-711 million over the same period. Cap ex for 2009 has been reduced to $40 million from the anticipated $60 million. The pristine balance sheet means TA is ready to take advantage of any bargain acquisitions, but management continues to be very prudent with the shareholders money. TA raised capital a couple of years back, selling stock when it was then trading over $40 a share, near the all-time high for the stock. Today, shares are at $5 but the balance sheet hasn't deteriorated. Any favorable turn could send shares soaring. (For more, see Digging Into Book Value.)

By Sham Gad

Sham Gad is the Managing Partner of Gad Partners Fund's, value inspired investment partnerships modeled after the Buffett Partnerships of the 1950's. Previously, Gad ran the Gad Investment Group and delivered annualized returns of 22% from 2002 to 2005. Gad is also the author of "The Business of Value Investing" which will be out in the fall of 2009. Gad earned his MBA at the University of Georgia in May of 2007. Gad runs a value investing blog. He can also be reached by visiting the Gad Partners Funds site. When not writing or analyzing businesses, Gad enjoys hanging out with his wife Maggie, reading, golf, and yoga

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