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Closing out of TA for a quick 33% gain

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August 09, 2010 – Comments (10) | RELATED TICKERS: TA

 

Talk about a quick trade.  On July 2nd I went long TravelCenters of America (TA) in CAPS stating that the company was trading for less than what I believed to be its liquidation value. 

Time to Travel to TA?

The following is my preliminary notes on TeavelCenters of America (TA). I will likely look into this stock in greater detail in the future, but I have to hit the road for the holiday weekend.

TravelCenters could very well be a dead man walking. Still at this point the company appears to be trading for less than its liquidation value. Here's a peek at how I came to that conclusion:

+ $156 million in cash / equivalents (applied at 100% of value).

+ $179 million in inventory, receivables, and other current assets ($255 million assuming a 30% discount which is conservative considering this consists of things like fuel, parts, and other "new" items. There certainly is some ambiguity here to it's best to be really conservative.

+ $293 million in property, plant, and equipment ($418 misted value discounted again by 30% to be conservative). This includes nine fully-owned TravelCenter locations and 2 joint venture TA locations (source page 31 of 2009 annual report).

+ $0 for intangible and other assets ($59 million on balance sheet, completely written off).

- $571 million in liabilities.

= $57 million left for shareholders in the event of a liquidation.

Compare that to the company's current market cap of $39 million and TA looks fairly attractive at this level.

Another way to look at this is to divide the $57 million in approximate liquidation value by 17.27 million shares outstanding and it comes out to $3.30/share, 50% above the company's current price of $2.20/share.

Yes Travel Centers has a ton of debt and it was slightly cash flow negative last quarter. No stock that's this cheap is going to be perfect. 

According to ycharts, last quarter TA was barely cash flow negative, burning $360,000. The Company was actually cash flow positive by $15 million in the disastrous year of 2009. One could make a strong case that the economy is better today than it was at this point last year.

Now one could argue that an investment in TA would be dead money for a while, until Mr. Market realizes how cheap this stock is, but unless management does something incredibly stupid it doesn't appear to me as though there is much downside at this level. 

Today TA reported a surprise profit (link), coming in at $0.07/share on $1.5 billion in revenue versus the $0.82/share loss on $1.4 billion in revenue that the single analyst who still follows the company was looking for.  Needless to say, TA's stock exploded today as the stocks of distressed companies do when they surprise to the upside.  TA's stock is currently up around 26%.  I took this opportunity to close out my CAPS long position in TA for a nice +33.60% gain, though that only translates to 24.67 CAPS points because the S&P 500 was up 8.93% during the month that my trade was on (at least according to CAPS).

Is there more upside here?  Perhaps, but I was not playing TA for some incredible turnaround by the company's management or a dramatic recovery in the economy.  I just felt that the stock was cheap, dirt cheap.  I have become more and more intrigued with trying to pick up stocks in CAPS for less than their liquidation value, or even better for less than the cash that they have on their books.  I suppose that you could call them the proverbial Benjamin Graham net-net stocks in a way.  I try to stay away from companies like these that are burning through cash.

The following statement by TA's management in today's quarterly press release sealed the deal on my decision to sell in CAPS:

The trucking industry is the primary customer for TA’s goods and services. Freight and trucking demand in the U.S. generally reflects the level of commercial activity in the U.S. economy. The condition of the U.S. economy generally, and the financial condition and activity of the trucking industry in the U.S. specifically, impacted TA’s financial results during the first half of 2010 and TA expects these matters will continue to impact its financial results in future periods. During the first half of 2010, although the U.S. economy showed increased activity, the generally difficult economic conditions in the U.S. continued to present TA with significant operating challenges. While TA’s fuel sales volumes and nonfuel revenues in the second quarter and first half of 2010 both increased on a same site basis over the comparable periods of the prior year, these levels of activity continue to be well below those experienced before the recession from which the U.S. economy now may be recovering; however, the strength and sustainability of any such recovery is uncertain, including the risk that a possible “double dip” recession may occur. 

As someone who thinks the U.S. economy is in the long flat portion of a square root sign-like recovery, that we aren't going to fall back off of a cliff but that the economy is not about to get significantly better any time soon either I don't want that sort of exposure to the general economy in my CAPS portfolio without a specific potential catalyst that could cause the price of the stock to go higher.  I like to play specific special situations with stocks, like companies that I believe are trading below their liquidation values, not drift along with the economy in a non-dividend paying stock.

Deej 

10 Comments – Post Your Own

#1) On August 09, 2010 at 4:13 PM, dragonLZ (99.33) wrote:

When I saw TA jump almost 30% today, the first thing that came to mind was your post about TA the other day.

I even wanted to post something about how sometimes a move in a particular stock reminds you of a CAPS player who had a pitch or a post that got your attention (because you either strongly agreed or disagreed, or liked or didn't like the pitch/post).

Congratulations on a nice call, TMFDeej.

p.s.

I liked TA a while ago, but it wasn't as good to me as it was to you. I'm still 50 points down on that call.

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#2) On August 09, 2010 at 4:26 PM, Momentum21 (80.66) wrote:

Great play here Deej, congrats...

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#3) On August 09, 2010 at 4:28 PM, TMFDeej (99.32) wrote:

Thanks everyone.  I'm probably being chicken for closing out now, but better safe than sorry in this environment.

You can congratulate me for real if this thing doesn't soar to ten bucks and make my early sale look bad ;).

Have a great evening. 

Deej 

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#4) On August 09, 2010 at 4:32 PM, alstry (35.64) wrote:

May I suggest you send all your gains to the government right now as the rising debt and government spending is the only reason why TA is still in business.......hurry, or else the government will run out of money.

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#5) On August 09, 2010 at 4:54 PM, Momentum21 (80.66) wrote:

#3 - my only thought (not knowing at all how you run your portfolio) is why not sell off in stages? book gains but hold some and play with house money...

If I make a play carrying this much risk...and liquidation value is my premise...why not see the pop through?

This is not a pure second guess, I am legitimately curious. : ) 

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#6) On August 09, 2010 at 5:23 PM, SultanOfSwing (98.07) wrote:

Deej,

+33 is a nice score indeed.  TA on TA might have told you to hang on for a few more days to see if more upside gain can be realized.  But FA on TA has apparently told you to take profits now.  The CAPS game forces one to make a 'binary' decision.  If I was playing this in real life, I probably would have scaled it off.

SoS

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#7) On August 09, 2010 at 6:26 PM, TDRH (99.67) wrote:

Nice call!   Rode your coat-tails in caps, but exited early.

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#8) On August 09, 2010 at 7:14 PM, MegaEurope (< 20) wrote:

Congrats on the gain Deej, you were right.  Hope we didn't talk you out of buying it in the last thread.

(I feel a little awkward whenever I see a past discussion where I took the wrong side of a trade - especially if I didn't have money in that stock myself, either long or short.)

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#9) On August 09, 2010 at 11:09 PM, Tastylunch (29.41) wrote:

hey You never go broke by taking a profit.

Congrats Deej, and way to stick to your guns!

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#10) On August 10, 2010 at 5:49 AM, TMFDeej (99.32) wrote:

Good point about selling in pieces, Momentum.  If I had a large enough position in TA in real life that probably exactly what I would do.  Unfortunately, CAPS does not allow such luxuries :).  

TA reached my estimated liquidation value for it and I had no conviction that anything other than a continued economic recovery or just momentum would cause its stock to continue to rise so I bailed.  I'll have to remember to follow TA to see how it does.  I think that I'll go and add it to my "Watch List" right now.

Deej 

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