Odds are, if you have gone on any lengthy road trip in the US or Canada, you have either stopped at or at least seen a business called TravelCenters of America (NASDAQ:TA). With the 280 travel centers, standalone truck service facilities, and its restaurant, all spread across 44 states and throughout Ontario, Canada, the business is a staple for long-haul drivers. Like many companies, TravelCenters of America experienced some pain as a result of the COVID-19 pandemic. But cash flows for the company are robust and recent performance has been fantastic. Already in recent months, the business has outperformed the broader market. And that should serve as a testament to the quality of the operation. Moving forward, I expect this trend to continue, leading me to maintain the company as a ‘buy’ prospect.
TravelCenters of America’s Q1 earnings performance has been great
The last time I wrote an article about TravelCenters of America was in January of this year. At that time, I cited strong industry conditions, as well as strong revenue and growing cash flows as reasons to like the company. I especially liked that shares were trading largely in the single-digit multiple range. Ultimately, this led me to rate the company a ‘buy’ opportunity, with one really big downside being some of the volatility in cash flows the business can generate from year to year. Since that article, the picture for the company, from a share price perspective, has been really great. Although shares have dropped in value by 2.7%, this pales in comparison to the 7.1% decline experienced by the S&P 500 over the same timeframe. Following the release of financial results after the market closed on May 2nd, shares are up a further 7.3%. If this gain holds, it would imply an increase in value of 4.4% versus the aforementioned loss the market has seen.
Fundamentally speaking, the picture for TravelCenters of America has been quite strong. When I last wrote about the firm, we only had data covering the first nine months of the company’s 2021 fiscal year. Fast forward to today, and we now understand how the entirety of 2021 worked out. Sales for the year came in at $7.34 billion. That’s 51.4% higher than the $4.85 billion generated in 2020. It’s also higher than the $6.23 billion the company achieved back in 2018. According to management, fuel revenue jumped by 74.3%, with this figure due in part to a 10.3% rise in gallons sold. But the biggest driver was a rise in pricing for the fuel the company sells, with that alone adding $1.8 billion to the company’s top line. Non-fuel cells also rose nicely, climbing by 11.4% due to a favorable product mix and additional sales from certain travel center restaurants that reopened or that are operating at expanded hours compared to when they operated during the pandemic. Meanwhile, rent and royalties from franchisees grew by 7.8% year over year as well.
On the bottom line, the picture also improved. The company went from generating a net loss of $13.90 million in 2020 to generating a profit of $58.5 million last year. Operating cash flow did decline, dropping from $244.41 million to $154.5 million. But if we adjust for changes in working capital, it would have risen from $85.98 million to $146.5 million. Meanwhile, EBITDA for the company also improved, climbing from $144.1 million in 2020 to $218 million in 2021. Much of this improvement came not from the increase in revenue but, instead, improved margins. The non-fuel gross margin for the company, for instance, expanded by 10.7%. That ultimately added $113.41 million to the company’s total profit margin. That compares to the $59.44 million added as a result of the improved fuel sales.
As I mentioned already, on May 2nd, the management team announced financial results covering the first quarter of the company’s 2022 fiscal year. For that quarter, analysts were anticipating revenue of $2.20 billion. Management beat that number handily, with revenue coming in at nearly $2.30 billion. Clearly, the 2.1% increase in fuel sales volume definitely helped. However, the company also experienced an 8.7% rise in non-fuel revenue. The strongest growth here came from a 43.9% rise in diesel exhaust fluid sales. However, the company also saw a 10.1 percent increase in truck service revenue. Store and retail services revenue grew by 4.5%, while restaurant revenue ticked up modestly by 0.6%.
On the bottom line, the picture also came in strong. Analysts were anticipating the company to generate a net loss of $0.05 per share. That number actually worsened, dropping from a negative $0.40 per share in the first quarter of 2021 to negative $1.10 per share the same time this year. But on an adjusted basis, earnings actually rose from negative $0.37 per share in 2021 to a positive $1.03 per share this year. This adjusted figure beat analysts’ expectations by $0.92 per share. In absolute dollar terms, net income for the company came in at $16.3 million. That compares to the negative $5.8 million generated one year earlier. Management has not reported operating cash flow figures yet. But we do know that EBITDA increased year over year, climbing from $28.6 million in the first quarter of 2021 to $55.4 million this year. In addition, the company also has cash in excess of debt at this time any amount of $19.52 million. That means the overall risk to the enterprise is significantly low.
If the first quarter this year is any indication of the company’s prospects, then 2022 would be a great time for investors. But the great thing to know is that we don’t need performance to be any better than it was in 2021 or even in 2020 for shares to warrant attractive upside. Using our 2021 results, for instance, the company is trading at a price to earnings multiple of 9.6. Because of a net loss in 2020, we cannot compute a price to earnings multiple for that year. In general though, I do not believe this is a good metric for determining the company’s value. If, instead, we use the price to adjusted operating cash flow multiple, the picture looks very positive. For 2021, this multiple would be 3.8. That compares to 6.6 if we use the 2020 figures. Meanwhile, the EV to EBITDA multiple for the company should be 2.5. This compares to the 3.8 reading that we get if we rely on 2020 results.
In truth, I do not believe that there are any real good firms to compare TravelCenters of America to. But comparing it to the automotive space more generally, we find that shares are trading on the low end of the scale. Using the price to operating cash flow approach, five companies I looked at were trading at multiples ranging from 2.4 to 136.2. In this case, two of the five companies were cheaper than TravelCenters of America. Meanwhile, using the EV to EBITDA approach, the range was from 3.3 to 9. In this case, TravelCenters of America was the cheapest of the group.
|Company||Price / Operating Cash Flow||EV / EBITDA|
|TravelCenters of America||3.8||2.5|
|OneWater Marine (ONEW)||2.4||5.8|
|Penske Automotive Group (PAG)||5.9||5.7|
|Murphy USA (MUSA)||8.4||9.0|
|Group 1 Automotive (GPI)||2.5||3.9|
|Lazydays Holdings (LAZY)||136.2||3.3|
All things considered right now, I believe that the recent performance of TravelCenters of America, from a share price perspective, is definitely warranted. Furthermore, I believe that shares offer additional significant upside for investors moving forward. Because of the volatility of the company and how susceptible revenue and cash flows might be during tough economic times, I cannot in good conscience rate the business a ‘strong buy’, but I do think it is worthy of a ‘buy’ designation at this moment.