Solid, Diversified Revenue Streams, Large Hidden Upside Could Deliver 60% – 80% Gains Over the Next Year
Management actively exploring spinoff options to unlock hidden value of $11.85 to $15.20 per share
At $14.98, shares trade at a thin premium of 11% to book value
Strong margins reflect operational efficiencies and streamlined synergistic businesses
TravelCenters of America LLC (NYSE: TA) was founded in 1992 and is a specialty operator of stores – gasoline stations, convenience stores, quick and full service restaurants, and truck maintenance and repair shops – along highways across the United States. Additionally, TravelCenters operates RoadSquad – a network of truck services, call centers and onsite services. The company does business under the brands: TravelCenters of America, Petro Stopping Centers and Mini Mart. As of March 31, 2015, TravelCenters operated 251 travel centers and 60 convenience stores with gas stations in 43 states across the United States and Canada. About half of the company’s stores are along the Eastern seaboard with the highest concentration of traffic.
Active Discussions to Unlock $11.85 – $15.20 in Shareholder Value
Private investment firm RDG Capital Fund Management LP has contacted TravelCenters’ leadership team to address concerns that the company is undervalued despite share price appreciation and improved operating margins. RDG Capital recommends a sale leaseback of real estate assets and a potential spinoff of the company’s truck repair services business.
TravelCenters controls an impressive portfolio of real estate that RDG Capital suggests is valued at about $400 million, which could unlock $5.70-$6.40 per share after a sale leaseback transaction. RDG Capital also noted TravelCenters’ truck repair services segment is undervalued as a consolidated business because the segment has revenues of about $750 million (for 2015) but cannot be valued at a multiple within the consolidated setup and represents an undervalued hidden asset. The investment firm thinks a spinoff of the truck repair business could add $2.70-$3.35 per share to shareholder value. Lastly, RDG Capital thinks the remaining business segments, gasoline and convenience stores with QSRs, would receive an improved pure-play which could add $3.45-$5.45 per share in value to shareholders.
TravelCenters and RDG Capital have remained in constructive discussions over the recommendations in order to decide what is best for shareholders.
At $14.98, Shares up 19% YTD with Significant Upside Potential
As of market close on May, 8, 2015, TravelCenters’ shares were at $14.98, well short of the high end of the company’s 52-week range of $7.18 – $18.10, with a market capitalization $574.4 million and a price-to-earnings ratio of 9.3x on earnings of $1.61 per share. Shares are well below pre-recession peaks and offer considerable upside of $11.85 – $15.20 in hidden value despite a 97% gain over the past year and a 19% increase year-to-date. TravelCenters’ shares traded at an 11% premium to book value.
Shares hit a new 52-week high of $18.10 on May 7, 2015, higher than the company’s 50-day moving average of $17.02 and 200-day moving average of $13.15. Since March 2008, mid recession, shares have increased 146%.
Investment firm Brean Capital LLC initiated coverage on TravelCenters with a Buy rating and a share price target of $23. Global bank Citigroup (C) maintained a Buy rating but increased its price target from $17 to $22. Relative to the company’s closing price of $14.98 on May 8, 2015, TravelCenters has upside potential of 54% and 47%, according to Brean Capital and Citigroup, respectively.
Factoring in recommendations by RDG Capital to boost TravelCenters’ shares to $24-$27, shares offer 60-80% upside potential.
TravelCenters does not currently pay dividends and does not anticipate paying dividends in the future.
Competitive Advantages Include Size, Prime Real Estate and Repair Services
The average TravelCenters’ retail stop has about 190 truck parking spots, more than double the average of the company’s competitors that average about 80 truck spots. The company’s locations have an average size of 25 acres while its competitors have considerably less. TravelCenters also has more repair bays and technicians than others, and provides more mobile maintenance and roadside emergency services. TravelCenters also operates 218 table service restaurants and 360 quick service restaurants (QSRs) under different brands. So the company has a broad base of diversified revenue streams and its higher acreage almost ensures higher revenue per store.
Retail Fuel Volume Stabilized since 2008 recession
The graph below shows a healthy comeback in freight volume since the 2008 recession, and is now above pre-recession levels. Total revenue per load has also stabilized and is in a gradual upward trend. TravelCenters has also reported a steady stabilization in retail fuel volume to about 2 billion gallons per year, up from 1.8 billion gallons in 2008. Moreover, TravelCenters offers more value to customers with their quick- and full-service restaurants.
Since 2008, TravelCenters reported a 36% increase in nonfuel revenues to $1.62 billion. Nonfuel revenues were 29% of total revenues but 66% of gross profit, and reflect the value of the other amenities the company’s gas stations offer which help significantly with revenue diversification.
New Amenities Attract More Business
TravelCenters opened several new QSRs at many of its locations. In Gadsden, Alabama, the company added coffee chain Starbucks (SBUX) to complement the already existing Iron Skillet breakfast chain. In Madison, Wisconsin, TravelCenters opened its first Popeyes Louisiana Kitchen fried chicken restaurant. TravelCenters opened 5 truck service facilities offering liquefied natural gas, diesel and diesel exhaust fluid in Louisiana and Texas. Additionally, the company opened 3 truck service and repair facilities in Ohio and Nevada that are open 24/7. TravelCenters upgraded its Columbia, South Carolina, travel center to offer sandwich chain Subway, 11 showers, free WiFi, truck scales and Western Union (WU) for money transfers and withdrawals on the go.
Aggressive Acquisition Strategy Emphasizes Growth
TravelCenters acquired 19 gasoline and convenience stores in Kansas and Missouri for $27 million, bringing the company’s total standalone gasoline and convenience stores to 79 as of May 1, 2015. Management expects to rebrand many of the locations under its Mini Mart brand and possibly add QSRs to some of the locations to complement existing QSRs. The 19 locations have an average size of about 3,900 square feet. In April 2015, the company acquired 26 gasoline and convenience stores in Minnesota and Kentucky. Since 2011, TravelCenters has acquired 92 properties with investments of about $438.3 million.
Management Focused on Maximizing Shareholder Value
Thomas O’Brien has served as President and Chief Executive Officer since 2007. Before joining the company Mr. O’Brien held senior positions with real estate management company REIT Management & Research (RMR) for 10 years. He oversees the overall strategic direction of the company.
Andrew Rebholz was named Executive VP, Treasurer and Chief Financial Officer in November 2007. Mr. Rebholz was with RMR from 1997 to 2007, holding financially focused positions.
Homer Hogg was appointed Technical Development Manager for the TA Truck and Petro Lube service business. In this newly created position, Mr. Hogg will oversee technical training and quality control to offer more efficient services to customers. Hogg also recently signed a 2-year term to be on the Board of Directors of the National Institute for Automotive Service Excellence (ASE).
Q1 2015 Revenue Down 28% on Lower Fuel Prices but Margins Drive Net Income
For the three months ended March 31, 2015, TravelCenters had total revenues of $1.41 billion (down 28%), income from operations of $32.2 million (up 561%) and net income of $15.7 million, or $0.41 per share.
Fuel revenues fell 37% while nonfuel revenues increased 7% and rent and royalties revenues increased 1%. Fuel revenues were hurt by lower fuel market prices during the quarter as sales volumes only fell 0.1% but fuel gross margin per gallon increased from $0.187 in 2014 to $0.225 in 2015 for the first quarter on operational efficiencies.
As of March 31, 2015, TravelCenters had $218.2 million in cash and cash equivalents, $230 million in long term debt and $535.3 million in total shareholders’ equity.
TravelCenters of America is a robust, differentiated and growing franchise, with shares that trade just 11% above book value and have significant hidden potential if the firm decides to spinoff and restructure its truck repair and real estate assets. In a positive for shareholders, management is engaged in productive discussions on spinoff possibilities. Moreover, even without the spinoff, this is a solid business with a strong balance sheet and solid cash flow, and shares fairly priced to offer strong upside at current levels. Any sizable dip in shares should be viewed as a compelling buying opportunity.