TravelCenters Of America: It's Complicated

First of all, the company operates in an intensely competitive industry, primarily offering diesel and other services aimed at truckers traveling the highways. Like The Pantry (PTRY), which we discussed last week, it makes slim margins on its petrol products, often entering into price wars with the competition. Recently, one of its competitors entered bankruptcy and was bought out by another competitor, which now has a much stronger competitive position.

While one might argue that TA's locations along prime highway junctions act as a competitive advantage, such advantages are but temporary in nature: TA does not own it's own locations, but rather rents them. As such, the landowner is free to kick TA to the curb if it's not willing to pay market prices for its locations. As such, it is imperative in this industry to be a low-cost operator. Unfortunately, many of TA's major competitors are private companies, making it difficult to determine how well TA is positioned to defend its market.

Furthermore, management's incentives are not entirely clear. Not only does management not own a significant stake in TA relative to what it makes from TA in bonus and salary, but management also has heavy involvement in TA's landlord and a company that does servicing work for TA. For example, TA's CEO and CFO are both executives of TA's servicing company. Management also has ownership stakes in these related companies.

Finally, for those more interested in an asset play than an earnings power outlook, the company's balance sheet is not nearly as pristine as it appears. A great majority of the cash is earmarked to pay back huge rent liabilities that are over and above the company's stated debt. The company has been recognizing rent expenses on the income statement over the last little while, but hasn't been paying much of that rent as of yet! This has made the balance sheet look temporarily better than it deserves to be, as these deferrals are not likely to continue, resulting in a cash outlay to cover these liabilities.