Closing out of TA for a quick 33% gain
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.