Should You Pump the Brakes on TravelCenters?


Interstate staple TravelCenters of America is flirting with its 52-week high after the company issued a favorable earnings release. But even at its current levels, the company trades at less than nine times forward earnings, and has a trailing EV/EBITDA of 6.7 times. With a tremendous national footprint in the trucking scene, and the possible beginning of an upward trend in freight activity, is TravelCenters still a buy at more than $9 per share? Careful, objects in the mirror may not be as attractive as they appear.

Business overview
TravelCenters of America operates roadside truckstops that offer fuel services, maintenance facilities, rest stops, and food service under the names TA and Petro Stopping Centers. Over 50% of the company's locations are in the top 10 states for trucking traffic. Your average TravelCenter location is far bigger than a normal fuel station, rest stop, and many other full-service facilities, giving it a unique market position. The company has 214 restaurants and an additional 290 fast-food restaurants it operates from the major franchisers. On the fuel front, 90% of TravelCenter sales are diesel truck fuel, with the remaining 10% made up of gasoline.

The macro situation
Freight volume may be headed north once more. As pointed out in the company's investor presentation, freight volume in the United States last went through a growth trend from 2000 right up until the financial crisis, growing at a volume CAGR of just more than 5% and a revenue CAGR of 10.2%. Predictably, these levels dropped off sharply in 2009 and remained relatively flat until 2011. Now, that chart is trending similarly to previous periods, and leaving five years or so of growth for the industry. This bodes very well for TravelCenters, if it's an accurate prediction.

TravelCenters has been able to navigate fuel-pricing flux quite well over the past several years, which is absolutely critical for the success of its business. In 2005, gross margins sat at $0.05 per gallon. Today, that margin is $0.17 per gallon.

Recent results
The two winter quarters are soft for the company, as truck volume is much lower than in warmer months. In the fourth quarter, TravelCenters incurred a net loss of $2.5 million -- roughly even with the prior quarter's numbers. EBITDAR (EBITDA plus rent and restructuring -- a useful metric in evaluating franchise businesses) increased 6% from the prior year to $65.6 million. Even though the company's gross fuel margin increased, it was nonfuel revenue that really drove the company, with segment revenues up 5.5% year over year. Nonfuel revenue is mainly due to the company's ongoing effort to buy back franchise-owned properties. Throughout the year, the company spent north of $50 million on the effort.

The results beat the Street on the bottom line and met expectations on revenues.

Things look strong for TravelCenters, but with a three-month gain of nearly 100%, is the stock overbought at this level?

Pump the brakes
By many metrics, TravelCenters would appear to be still attractively valued, even after its huge run. But investors may want to be cautious before hitting the buy button.

TravelCenters has not produced any free cash flow for shareholders in the last four years. Now, the company was in recovery and needed to incur high capital expenditures to get back on track, yet these numbers have ballooned at rates much greater than revenues. In 2009, the company spent $37.7 million in capex, with revenues at $4.7 billion and net loss of $89.9 million. By 2011, capex increased more than three times to $124.85 million, with revenues of $7.89 billion and net income of $23.5 million. For 2012, capex reached $188.7 million, with revenues at just under $8 billion and net income at $32.36 million.

So, over four years, capital expenditures are up five times, while sales are up just 70%. Along the way, the company has issued offerings in both equity and debt to fund expansion. Is this really that appealing of a return? Management's capital allocation has yet to provide any meaningful cash flow, while diluting shareholders -- a bad sign for long-term investors

I like TravelCenters' business, on the surface. A captive roadside audience, high barriers to entry, and improving margins all suggest a solid business for the long term. Low valuation metrics can be attractive, if they misrepresent the company, but I don't think there is much misrepresentation here given the unexciting returns on debt and equity. TravelCenters may not warrant much more than its current value, if that.

I recommend investors wait to see if these heavy up-front costs yield better returns in coming quarters and years. Something just doesn't seem right here.

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