Travel Centers Needs Free Cash Flow to Be Attractive

Roadside truckstop Travel Centers of America has been a great stock to own this year -- up more than 118% since early January. The gains are due to the realization of a turnaround strategy and a couple impressive quarters. The most recent quarter, however, failed to impress investors and analysts. Using the standard valuation multiples, the company looks attractively priced even with its triple-digit, six-month run-up. Furthermore, freight activity is slated to increase with the continuing economic recovery. So, with the recent earnings in mind, let's see if the situation at Travel Centers calls for a buy.

Earnings brake
In the early part of May, Travel Centers' stock sank double digits on the back of a lackluster earnings report. Though the company beat EPS estimates, losing just $0.41 per share, as opposed to the Street's estimates of $0.43 per share, it failed to impress on the top line. Revenues came in at $1.96 billion for the quarter -- a 1.9% discount to the number from the last year's quarter and well below analyst estimates of $2.11 billion.

There was actually plenty to celebrate, though, despite the stock drop. Fuel margins continued to improve for the company, along with convenience store revenues and growth in EBITDAR. As a side note, EBITDAR is a go-to metric for franchise-heavy businesses.

What it means
Part of the drop in revenue was due to a 3.3% drop in fuel sales, which clearly was upsetting to investors, but it should be noted that 60% of this drop was a consequence of the company exiting the wholesale fuel business -- part of its long-term, cost-cutting maneuvers.

The company is also addressing the shifts in the business, mainly fuel-oriented. Travel Centers recently struck a deal with oil giant \Shell in which the oil company will construct a network 100 natural gas fueling lanes, at up to 100 different Travel Centers locations over the next several years. This will certainly help offset the efforts of trucking companies to cut back on fuel costs -- a trend that many analysts fear for companies like this one.

Value or no?
At under seven times forward earnings, Travel Centers may appear to be a bargain, but don't get too excited. Management claims it is "positioned" for profitability for 2013, but isn't really giving guarantees.

The company has been spending a lot of money buying new locations and revamping old ones. Smart for the longevity of the business, sure, but there has not been an equal increase on the financial statements over the past few years, suggesting capital allocation skills are less than ideal.

In general, I love a franchise-oriented business. They often point to attractive gross margins and substantial free cash flow. While Travel Centers has certainly improved its margins across several stages of the income statement, free cash flow is nonexistent. Part of that is due to the heavy reinvestment, but if I am buying a franchise business, give me my cash flow.

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