TravelCenters of America Inc. (NASDAQ: TA), the third-largest operator of truck stops in the US, is uniquely positioned to monetize improving dynamics of the US trucking industry.
The company’s turnaround plan is beginning to deliver and with assets that were always well recognized in the truck stop industry, investors will be well served to dig deeper into the name now that fundamentals suggest that this time trucking might be the flag bearer of the transportation sector, coming out of economic recession.
When most brick-and-mortar retailers and restaurants are suffering, the resilience of TravelCenter’s business is shining through and the company may come out in better shape as the economy opens up. Balance sheet risks all but gone and there is plenty more room for improvement on revenue growth and margin front, given most recent appointees to the new senior leadership team started in May/ June timeframe.
The stock, which is covered by 1-2 sell-side analysts, should command more interest from the institutional investors over the coming months given the top two truck operators are owned by Warren Buffett, the legal structure has changed to a corporation, and earnings, as well as cash flow trends, are turning positive.
Yes, we own the stock and the name was part of our weekly list of top ideas for the week.
Perfect market conditions
Trucking is strong and coming back fast
Yes, the economy is weak and that usually leads to weakness in the transportation industry, but not so much for this one. Call it the e-commerce effect, but trucking is coming back fast.
Both shipping volumes as well as overall spending are back to normal and most industry analysts expect the rising price environment to continue into Q1 2021 due to inventory restocking, with contract pricing in both TL and intermodal resetting higher.
Truckload spot rates are back to normal and hovering near highs of 2018.
All this market strength is leading to more demand for trucks. As the chart above shows, during the 2001 recession, it took the industry 48 months to come back and this time barely 3 months.
Truck stops are no more competing on low fuel prices.
Fundamental changes are happening in the truck stop industry as well. Maybe its responsible competition, changing demographics of drivers, or regulatory changes limiting time drivers spend on the road, but low fuel price is no more the primary reason for drivers to choose a particular truck stop.
Instead, the friendliness of the staff and the quality of food ranked as the top two reasons why a particular truck stop was preferred.
Why it matters? Because the top three players control 27-28% of the market and the rest is owned by small operators. If the market is not driven by low fuel prices alone, large professional operators are better positioned to compete and drive better profitability.
Trend favoring TravelCenters
Given drivers spend up to 56 minutes a day looking for parking, losing on average $4,600 in compensation per year because of the parking shortage, large format stores do have an edge catering to the demand for the full-service facilities.
TravelCenters of America sites typically sits on 25 acres of land, offering 200 truck parking spaces, more than double the size and capacity of Pilot’s, the largest truck stop operator in the US, stores.
Turnaround starting to deliver and there’s plenty more to come
One look at the long-term chart of the stock, down 90% since 2007 and down 50% over the last five years, will make it clear that the business has been through a tough phase and the reasons weren’t very different from many other retailers who met the same fate, i.e. high debt, poor profitability, bloated cost structure, lack of growth, etc.
Starting to deliver results
To address these problems, the present Board and management have been executing on a turnaround plan, the results for which are getting evident, despite the Covid-19 driven revenue growth challenges. Some of the highlights of this turnaround are,
- Net debt is down to $204 million, not so significant given the EBITDA for the last twelve months is near $171 million and adjusted EBITDA, excluding biodiesel tax credit is $100 million for the same period.
- Net income and EBITDA improved throughout the pandemic, even though sales declined by almost 25% during the first half of this year.
|TravelCenters of America Inc.|
|2016||2017||2018||2019||Q2 2020 Annualized|
|Site level operating expense||$959||$873||$915||$944||$790|
|Selling, general and admin||$139||$146||$136||$155||$152|
|Real estate rent||$262||$275||$283||$258||$252|
- Most operating costs that have remained stubbornly high throughout the last few years have started to come down in a meaningful way, especially Site Level Operating expenses, the biggest component of them all.
|TravelCenters of America Inc.|
|Gross Margins||2016||2017||2018||2019||1H 2020|
- Another big improvement is on the all-important gross margin front. It is noteworthy that the margin improvement in the fuel business was during the declining fuel volume environment, further establishing the sustainability of the last two-years trend.
Are there opportunities for further improvement? Yes, plenty more
Even after the recent cost cuts, the company’s cost structure continues to be high relative to other players in the retail and restaurant industry. Every 1% site level operating expense margin improvement is equivalent to $9 million of EBITDA.
Franchising that carries a 100% margin is another growth opportunity. Started last year, the company has signed 21 new franchise agreements since the beginning of 2019, out of which 9 were in this year alone.
Yes, fuel gross margins have continued to improve over the last two years but on an absolute dollar basis, fuel gross margin hasn’t increased much and for every $0.01 improvement in fuel gross margin, the company’s EBITDA has the potential to improvement by $20 million.
A valuation that ignores anything discussed so far
With the stock trading at $28, enterprise value comes close to $600-650 million, pretty cheap for a business that has generated almost $150 million of EBITDA per year over the last 3 years, and capital expenditure for the current year is expected to be $68 million.
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