Fun conference call ($TA)

by PlanMaestro

Conference calls are usually boring and worthless affairs. However, you have to eat your greens. The main reason to hear them is the Q&A that can give good signals on the market perception on the risks and opportunities. And every once in a while you can have a real exchange….

Travel Centers of America -TA- is trading well below tangible book value and has more than 7 USD per share of available cash. Trading in the low 3s and almost cash flow breakeven it is natural to raise the issue of buying back stock.

The following exchange is a great example of the tensions of management and investors on the best uses of free cash flow. Usually you catch more flies with honey but there were numerous reminders of the opportunity of stock buybacks in the previous two conference calls. Management not only did not get the message but decided to invest in an unrelated business.

Neil Goldman – Goldman Capital Management

First could you explain to me this $5 million plus investment in the insurance company?

Thomas O’Brien

Yes. It is not a captive insurance company, but it is an opportunity to pool resources with larger property companies that are also affiliated our affiliate, REIT Management & Research, for the purpose of capturing some of the profits that insurance companies typically make. Our share of those profits will be from the earnings on the investments in that insurance company and from premium savings as that insurance company ramps up its writings of policies.

Neil Goldman – Goldman Capital Management

What kind of policies are they writing?

Thomas O’Brien

Today the insurance company has just been formed and the policies that are planned would be property insurance, workers’ comp. It’s really an open field for what that company can do.

Neil Goldman – Goldman Capital Management

Okay. You know, last conference call I brought up the issue of buying back stock. You’re sitting today with $7.40 in cash net of the deferred rent and you’re sitting with over $3 a share, if you even include the line of credit, which really goes against the other assets like fuel, etc., etc. You’re sitting with a $21 tangible book, okay, and a $2.74 stock. And instead of buying back your own stock at 85% of tangible book, buying your own stock back at less than cash, you’re investing money in an insurance company that has nothing to do with your core business? I am really missing the point and I’d like an answer on that.

Thomas O’Brien

Neil, the insurance company investment is really a lot like some of the other operating initiatives that we’ve undertaken. It’s intended to provide us with future benefits to do things like not generate an $18 million loss.

Neil Goldman – Goldman Capital Management

But it’s an investment in something unrelated. It’s not like it’s a captive insurance on your operations which could save you money. This is a new investment in an unrelated business, right? It’s property and casualty, it’s other things. I don’t understand that.

Thomas O’Brien

It isn’t an unrelated business. It is a business that will have, if it’s successful – it’s not without risk – but if it’s successful it’s a business that will have positive impacts on our ability to generate income, and I don’t see where – maybe I didn’t explain it right – but I don’t see how it could be concluded to be unrelated.

Neil Goldman – Goldman Capital Management

It’s an investment in an insurance company, right? It’s an insurance company that’s doing, you’re saying, property and casualty or other forms of insurance.

Thomas O’Brien For its owners, including us, right?

Neil Goldman – Goldman Capital Management

Even if this is a correct investment strategy – and I’d have to understand more about this insurance subsidiary to understand that – it still makes no sense to me why you haven’t taken an aggressive stance in terms of the buyback. You have ample liquidity. If you don’t think the stock’s a good value then you ought to sell the ompany, okay, or sell off half and shrink the capitalization dramatically. I’m sure some of the other players would buy areas where they wouldn’t have antitrust issues on the major players. And I really think you’re wasting an enormous opportunity to maximize shareholder value, which in the end is your job. Yes, you have to grow the company, you have to turn it profitable, you have to achieve the highest ROI for the company. And if you can’t get a higher ROI by buying your own company back below net cash and at 85% of tangible book, then I don’t know where else you would get those kinds of returns.

Thomas O’Brien

Neil, I think that you and I simply disagree on this point. We’re committed – I’m committed – to preserving liquidity in the face of the economic backdrop that we have. I’m committed to trying to increase our ability to meet our obligations and to generate net income for shareholders. And from time to time, I suppose, I may do something that not everyone agrees with, but it is that compass that I’ve described that directs me. And perhaps we will never agree on this.

Neil Goldman – Goldman Capital Management

Well, I think you should ask in the best interests of shareholders but I don’t think you’re doing it, so I guess we will disagree. Thank you.

Advertisements