BV - Funny thing is the past two days that an SA article has been damaging RAS' price, an earlier victim of SA butcher stories (EBIX) has FINALLY had two of its strongest days in the past year or two. EBIX is still cheap, Check out this insurance software specialist that is trading at a trailing PE of 12.5, and which should grow earnings significantly this year. Market cap is just $740 Million.
Yes Yes Yes - Cost of capital is the key. See the text "Cost of Capital" by Shannon Pratt and Roger Grabowski. Incredible book. Just incredible. (My copy is autographed!) Bring it on Joel.
RAS has been one of my top 2 or 3 holdings for each of the past 4 years. The company did well in 2014 but the stock had a neg return. That almost guarantees a positive stock performance in 2015. Meanwhile we get to reap those fat dividends.
You may be hoping for a big hit but I doubt it will happen. How many shares sold cheap after hours? a couple hundred maybe? TA is still cheap, certainly compared to PTRY, which is being acquired. TA should soon be trading in the lucky $13s.
sfvip - it is obvious. They don't issue equity because dilution is the enemy. The 8% coupon is high, but the way I calculate ROE, TA has an extremely high ROE. Not sure, but I think Yahoo is dividing net income by book value of equity.
I divide cash flow after debt service by market value of equity. If 2015 EBITDA is $125 Mil, interest expense will be about $25 Mil with the new debt. If income tax is $20 Mil, and Maintenance Capex is also $20 Mil, then remaining cash flow to equity is $60 Mil. Market cap is now about $400 Mil. So ROE by my count is 15%. It should be higher because the new debt is now returning zip in a money market account earning 1% or so. That cash will be deployed in cap improvements and acquisitions, which should grow EBITDA in years to come. Estimating maintenance CAPEX is also very inexact. CAPEX will far exceed $20 Mil for the next few years, but these CAPEX exceed the maintenance level.
Had management issued shares instead, ROE gets crushed. 8% is not cheap for debt, but it is still cheap compared to the cost of equity capital. They are right to use the cheapest capital that is available.
Happytrader questioned whether the aggressive strategy of TA's management is wise, borrowing money at 8% to buy stores and fund capex to improve stores. Their 3rd quarter report says it is working. The stores they bought over the past three years have seen their store operating income double from $8 Mil to $16 Mil from the quarterly pace when purchased to the most recent quarter. (These numbers are before corporate admin and overhead.).
TA was trading at a trailing EV to EBITDA multiplier of around 6.7X before taking on the new debt. The cost of the new debt aint cheap, but I am confident this leverage will benefit shareholders. If EBITDA inches up to $125 MIL, from about $115 Mil currently, and you put a 8X multiplier on it, EV becomes $1 Billion even. Debt is now near $625 Mil with the new debt, but you have to subtract the $125 Mil cash on hand at 9/30. The new debt is deployed in the form of cash right now, but lets assume it gets spent quickly, then net debt would be about $500 Mil. The equity value would also be $500 Mil, which pushes the stock up to about $13.50, on its way to still higher prices.
TA is a solid buy.
MBA, Canisius College, Also have earned designations CBA, CVA, MRICS. Appraisal Practices Board invited me and 9 others to be members of a roundtable to discuss tangible and intangible asset valuation in October. Investors like large EPS not small EPS. More shares will shrink EPS, and investors will run for the hills if more shares are issued.
Where did you get YOUR education?
Do you understand the term "cost of capital"? If you want to make money in the market, you need to earn a high return on equity. TA has only moderate leverage. Use of debt enhances the return to shareholders. Issuance of new shares just kills return on equity. Its simple math. You are really an amazing idiot.
Look at PSEC. Their earnings have exploded over the past three years but they just cut their dividend because the number of shares outstanding grew even faster than earnings. In that case management is incented to issue more shares cuz its a fast way to get more capital, and their pay is tied to a management fee tied to asset size. So their motivation is contrary to shareholders.
Schwartzberg- Please learn to read before you embarrass yourself with inane comments. Duh.... its a debt offering, and so yes now that are receiving $120 Mil cash. (They dont have plenty of cash??? I think $120 Mil on top of what they already had is quite a bit). The genius at the top of this message was wishing it had been a stock issuance instead, so I said that he was making a dumb wish wanting dilution. And yes, the debt issuance is a good thing, though 8% is a pretty high cost in this environment. So I am long and happy to own TA.
So read before you spout next time.
What an idiotic comment. Dilution is the number one enemy, and you are wishing for it ?!? You need to retake finance 101. They now have plenty of cash, so the last thing they need is more shares.
valubyer • Aug 31, 2014 11:14 AM:
"Good post. But, a few pennies below NAV is still dilution. Since 6/30/2010, book value (or total NAV) has gone from $711 mil at 6/2010 to $1,114 mil, @ 6/2011 to $1,512 mil @ 6/2012 to $2,656 mil at 6/2013 to $3,618 Mil most recently. Almost all of the increase to equity has been from issuing shares, diluting. I have been in as a long since 6/2010, and have been amazed how well they kept the internal rate of return so high. But there are limits, and I think they have hit the limit. I believe they cut the dividend to $.08 or $.09, and then the stock will drop, and then I will re-enter.
In spite of the recent insider buy, I think they will have to cut. JMHO."
So today, 12/8, I bought quite a few shares.
Not a bad prdiction on my part. I said they would cut to between $0,08 to $0.09. I wasnt smart enough to estimate $.08333. Anyway, true to my word, I was a buyer today.
If you are going to reference an EBITDA multiple, you really have to add the debt and subtract cash from market cap, The result is the EV, and for TA, EV approximates $715 Mil. I estimate forward EBITDA around $125 Mil, making the multiple about 5.7X. And yes, that is a cheap EV.
I loaded quite a few more shares after earnings, and particularly after the drop below $9. Everything in the earnings report was excellent except that gallons sold were down a tad. With the acquistions, total gallons sold will grow alot, and meanwhile there is great sales and profit improvement as the acquired properties are brought up to the TA brands.
With 3rd qtr EBITDA of $42 Mil, and Enterprise Value of about $650 Mil, TA is cheap indeed. I would guess that we will be seeing annual EBITDA around $140 Mil over the next 12 months, which is a multiple of around 4.6X. If EBITDA is only $125 Mil, the multiplier is still only 5.2X.
If TA does $140 MM EBITDA and trades at a 7.5 X mult., EV would be $1,050, and stock price would have to double.
How is it possible that the 3rd quarter charge has been increased by $300 Mil since the earnings announcement to the filing of the 10Q and it seems to be a secret. Other than the 10Q itself not a word has come from FNFG announcing the change. Buffalo News and another upstate paper got the story cuz I guess they read the 10Q.
I sold my FNFG stock cuz I think there will be an opportunity to buy it lower when this news filters it way out.
I am here too. Don't forget they have about $100 Mil cash and no debt, so enterprise value of the business is just $420 Mil or about 4.5 times EBITDA.