My modeling assumptions
- They will continue to defer rent through Q4 2010 but then pay it off in Q1 2011 rather than pay the 12% interest rate. I can’t see any reason why they would pay that interest rate and just sit on the cash.
- I use the forward curve off of Bloomberg to project diesel prices
- “Miles driven” drives both non-fuel revenues and gallons of fuel sold. It’s anybody’s guess how this will trend. Because it is seasonal, I’ve been using year-over-year (YOY) growth rates. I am assuming Q3 will probably be strong, Q4 will be weak and then it will slowly rebound from there. I’m assuming YOY changes of +2% in Q3 09; -2% in Q4 2009, flat in Q1 2010 and 1% growth starting in Q2 2010 through Q4 2011. To put this in perspective, miles driven started to decline in Q4 07. Starting in that quarter and going through Q2 09, the YOY growth rates have been: -0.6%, -2.3%, -3.6%, -4.5%, -3.3%, -1.6%, +0.6%. So Q2 09 was the first YOY increase since September 2007
- Because fuel margin (calculated as profit per gallon) is correlated with diesel (TA appears to make higher margins when the cost of diesel is higher – which makes sense), I am projecting that fuel margin will fluctuate by 1/3 of the change in the price for diesel


Conclusions
- HPT burdened TA with leases that are not sustainable. Pro forma for current lease expense, the company has never really made money
- It will take a pretty roaring economy to both offset this lease expense and generate enough earnings to result in substantial positive free cash flow
- My assumptions are largely bullish
o diesel increases according to the forward curve and this drives an increase in their fuel margin,
o they are able to keep costs at current levels (they’ve cut a lot of expense since 2008),
o miles driven starts to rebound as discussed above
o they keep CapEx at current levels
- These assumptions result in negative cash flow until early 2011, at which point it starts to pick up again. So absent a strong economic rebound or a change in the leases, I believe net cash per share will decline from $7.32 to about $5.11 / share by Q1 2011 before creeping back up.
- While that suggests a decent level of safety to the stock at current prices, it’s hard to see the company ever generating positive EPS or more than breakeven cash flow.
- I can’t help but conclude that the spin off was a way for HPT to get some value from the market for the TA business while entering into long-term leases that sweep most of the cash flow back to HPT in the form of rent expense.

While this paints a mixed picture, having $7.32 / share in net cash helps mitigate some of the risk and I think this company is highly leveraged to a strong economy. While I don’t see a strong rebound happening anytime too soon, TA has good upside exposure but with limited downside from here.

Valuing the company at 5x EBITDA results in $16 / share by Q4 2011. Admittedly, this is a long way out.

I bothered to take the time to share these thoughts because I have read some thoughtful posts on this board and it appears some of the people here understand this company pretty well. I welcome any feedback on my post – please poke holes and tell me where I’m wrong. I’m happy to share my model. Just email me at debtinvester@gmail.com