Key success factors part 4 ($TA)
by PlanMaestro
Having distilled the key success factors, selected the appropriate metrics, and collected the data, is nice to check the circumstantial evidence to see the accuracy of the 80/20 analysis. I collected several articles, but I think the following four will give you a sense of the industry and of Flying J’s disruptive influence. The first one is an interview of Flying J’s current CEO on how they got into this mess:
The current CEO, Crystal Call Maggelet, assigns much of the responsibility for the bankruptcy to J. Phillip Adams, who led Flying J for almost two decades. Adams, said Maggelet, was an empire-builder who wanted to put Flying J on the map without giving enough consideration to the possible financial ramifications.
“Phil is all about growing the top line and revenue growth. He wasn’t always that excited by profitability. Although Flying J did
via Flying J’s bankruptcy a tale of rapid growth without corresponding profit – Salt Lake Tribune.
Followed by a consultant view on how Flying J shaped their culture
I always liked Flying J, as the founder Jay Call reminded me of my grandfather who was in the oil distribution / retail sector. He built the chain on offering a new approach to the truck stop image – clean facilities with a price leading (low cost) fuel approach. Jay Call was tenacious and scrappy in his business. Full disclosure – we did some marketing work for them several years ago.
While most of the fleets bought their on-road fuel from the competition, Flying J found considerable success with the small fleet / independent contractor segments. They were not only in the retail business, but the also owned some oil wells, refining, pipelines and also had got into financial services (fuel cards, banking, insurance and equipment financing). This merger however only involves the retail segment.
via Major Truck Stop Competitors Merging – Flying J + Pilot = Higher Ret – GLG News.
Flying J not only disrupted the industry in the US but also in Canada. This is a perspective from a Canadian executive on the recent changes in the industry
In 2006, Flying J began a partnership with Shell Canada. The Canadian oil and gas producer supplies the diesel and the U.S. chain provides the brand and the retail template.
The companies pledged to invest $200 million, build 15 new “travel plazas” across Canada and upgrade existing Shell facilities.
Since then, says McKnight, the Flying J truck stop has become “the Holiday Inn of truck stops” because identical stations on both sides of the border appeal to Canadian drivers who haul goods to the U.S. and at home.
Canadian truck-stop operators can’t compete, adds McKnight, because Flying J is using diesel fuel as a “loss leader” to draw truckers into truck stops and make money from restaurants, repair shops and other services.
And the final one is a piece of history from 1999 on how the travelcenters became what they are today
Since the mid-1980’s, shrinking profit margins on diesel fuel and increasingly efficient truck engines have caused companies like the Ohio-based Travel Centers of America, the largest full-service truck stop company in the country, to look to four-wheelers, including R.V.’s, for profits. A 1995 study commissioned by NATSO, formerly the National Association of Truck Stop Operators, estimated that if just 1 percent of rural auto traffic were diverted to buying gas and eating meals at truck stops, the result would be an extra $300 million annually for a $37-billion-a-year industry. (Most budget-conscious truckers, noted Forrest Baker, a retired trucking industry consultant, do not eat two sit-down meals a day and ”one may consist of bread and bologna.”)
At least 80 percent of truck stops now call themselves ”travel plazas.” Travelers can visit a massage therapist, see a chiropractor, get a manicure or, in the case of Sierra Sid’s 76 Auto/Truck Stop Casino on I-80 in Sparks, Nev., marvel at Sid’s gun collection and Elvis memorabilia.
via Truck Stop’s Image Takes Turn Toward Glitz – The New York Times.
Variant Perceptions 
Hi, SFI_Watcher here from the GSL msg board. Thanks for the good series of posts on TA; I’m also a TA holder, having picked up a decent-sized stake last December in the $1.10-$1.30 range. I have a bit of a different lens on this, given my cost basis; but regardless, I find myself trimming my TA position now that the stock’s caught on fire, with Leucadia buying in et al.
If I’m reading you correctly, your thesis on TA basically boils down to operating improvements:
+ Truck mileage has bottomed
+ Fuel-margin pressure should ease, now that Flying J is returning to rationality
I don’t disagree with these points. However, I would argue that:
– Even in a more rational pricing environment, fuel margins still get squeezed when gas prices rise. (On the flip side, when gas prices fall, TA shows outsized profits — see Q3 ’08 results for an example). This is an industry-wide issue, and TA has no pricing power in the face of industry behavior; and so earnings will continue to exhibit volatility despite an improving economic/competitive climate.
– Be sure to take a close look at the HPT lease terms. The lease payments ratchet up each year by a goodly amount. So much so, that in my opinion, a majority of TA’s future growth in op income will be confiscated by HPT in the form of higher lease payments.
– TA has a serious agency problem, in that it is effectively being managed for the benefit of it’s leaseholder, HPT; so it’s not guaranteed, for example, that they will optimize their balance sheet for ROE. See your own post on TA’s insurance investment / lack of stock buybacks for an example. Any valuation would have to include a significant discount for the risk of uneconomic decision making by mgmt.
– In a similar vein, I’m not convinced TA management is committed to defending the value of the shares. For example, the rent-deferral agreement included handing options to HPT which, when executed, will dilute current holders by about 10%. It’s easy to criticize the deal with 20/20 hindsight, but really, the motivation for the rent deferral was never fully obvious to begin with, given that TA already had a sizable cash position before the “troubles”. So there’s been a considerable value transfer to HPT for what has proven to be very little benefit to TA. I worry that TA mgmt will take further dilutive actions in the future.
I find it interesting that you haven’t even put forward the balance sheet argument: $7+/share of unrestricted cash, some of which could end up back in shareholders’ pockets. I’ve never believed this one myself, though. That money exists for one reason: to provide a guarantee to HPT that TA will make their lease payments, come hell or high water. It is unlikely that shareholders will ever see a significant return of capital from TA, no matter how much analysts try to shame management about it on conference calls.
Sub-$1.50, all of these issues were washed aside by the margin of safety being offered by such a cheap stock price. As we approach $5/share tho, they deserve much more scrutiny and concern. I’m not saying the stock couldn’t go higher, but at today’s price you are gonna be one of the later ones to the party. (Sorry.)
Anyway, I’m enjoying your blog, & will be carefully “watching” your future ideas & picks 🙂
–watcher
Absolutely Watcher :). And what a nice buy you made. The margin of safety was an important part of why I bought too, but the series was more on using KSFs to drive to a decision.
I am not in the camp of those who think this stock should trade at its tangible book. The economics of this industry are terrible as you can see in the first part of the series. With luck this should trade at 0.6-0.7 of tangible book ($12-$15 per share). Is it possible that market madness could push this higher? Given the operating leverage, high fixed costs of the lease, and ease of the price war in the short term this could sky rocket. But long term, your points about gas prices, management and the HPT conditions are pitch perfect. Maybe I should write the things that worry me about $TA.
SFI_Watcher – you make some excellent points about the agency problem and HPT confiscating future income. However, this has to be considered alongwith the following:
a) HPT will not kill the goose that is laying golden eggs every day
b) Barry Portnoy and others in HPT management own TA shares (granted – this is a small portion of Barry’s net worth)
Thanks Manoj. I agree that HPT will not sabotage TA, and indeed HPT has acted — and will continue to act — as a sort of protector of TA in times of distress. But I have to believe that when push comes to shove, HPT’s well-being will be prioritized above TA. The punishing terms of TA’s lease are a clear demonstration of that.
The real money for Portnoy and company is in the $2 billion market cap HPT, not TA which is 1/20th the size. If I was CEO of HPT, given the relative importance of the two companies, I would aim to make it look like TA is doing just well enough that I can continue to escalate the rents and grow my own bottom line. So while it’s unlikely TA will go to zero, it’s also unlikely they will realize the full value that a truly independent company would.
Well, hopefully nobody heeded my words of caution, as today alone we’ve blown right through $5 and are mounting a serious challenge at $6! I wonder, where were all these buyers just two months ago, when we broke below $2? Why is something that the market wouldn’t touch at $2, now such a hot item at $6?
Of course, $2 was too cheap in hindsight. But it looks to me like we’ve come too far too fast, there’s a lot of hot money here right now; and so I’m viewing TA as a trading asset in the near term, watching for “toppiness” with an eye toward cashing out some gains.
TA could perhaps be worth $12-$15 long-term, if everything goes well. But if I was considering opening a new position at $6, I’d first want to see some hard evidence that TA will be able to successfully turn those potential operating improvements into real operating profits.
I know you’re using TA as an extended example in your “key success factor” model, but one element of success has to be choosing an entry price with attractive risk/reward, no?
For an investor that is key: an entry price with a margin of safety. I would not be buying at this price, because I think there are alternatives.
The issue now is when to sell. I still believe it is undervalued and it has momentum. Paraphrasing one of the Leucadia guys: buying is a science, selling is an art.
I wouldn’t be buying TA at these prices as the MOS is much reduced. I had an order open at $3.00/shr. a week ago before the run-up, but didn’t change my order price as I don’t particularly care for chasing stocks prices. I much prefer to let the prices come to me.
I am paying for it right now in that i’ve missed a run-up, but I do think this will soon come down in price as it has just run too far too fast IMO. As many of the readers have mentioned, the economics of the business are not great and so overpaying could prove to be a costly mistake later.
When I was reading the TA SEC filings, HPT peaked my interest because of the seemingly advantageous lease agreements with TA as Watcher mentioned. I know that this post is about TA specifically but I was wondering if any of you have looked into investing in HPT as an indirect play on TA’s potential?
I just asked an investor that I respect on REIT issues, and he thought it was pricey. 80/20 so I did not go deeper
As it turns out, one of the best days in ’09 to have bought HPT was the day they suspended dividends on the common, and the stock cratered to around $9. (I’m sure there’s a “variant perceptions” lesson in there somewhere.) But I’m not sure buying HPT at $19 — a 10x PE — with material exposure to lodging and transportation is a brilliant move.
A slightly better investment, IMO, would be the HPT preferreds, currently yielding over 9%; but even that is still not cheap (certainly not compared to the 20% yields they traded at in March).
Thanks PlanMaestro and Watcher for your thoughts on HPT. HPT at $19 does appear very pricey. But your comment about the tanking of the stocks price to $9 when they suspended the dividend, and recent history of GSL with their dividend suspension indicates that perhaps the dividend suspensions are reasonable events to look out for when seeking hidden value in a contrarian manner.
One of my favorite tactics too! REITs, MLPs, Shipping are sectors that attract income investors and they usually tank in recessions. But you have to know what you are doing because dividend/distribution suspensions can also signal problems (financials). You have to check liquidity.
But you know all this Andrei 🙂
Does anyone know of a good source for dividend suspensions?
[…] Following post, circumstantial evidence […]
Is any of you still holding TA? Do you see any of the listed KSF changed for the company? Thoughts?
Tom, I sold in the low 6s but may buy again if it drops below 3.5 again.
Recent truck statistics show an stabilization but no more than that. Fuel margins seem stable too but as you imagine high gas prices can detonate another war.
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