Like many analysts, we closely follow the actions of Warren Buffett. Widely regarded as one of the greatest value investors of all time, Buffett’s investment decisions provide the only insights available to his thought process. He never fully explains why he buys or sells so we are left to study the action.
Recently, Warren Buffet’s investment company Berkshire Hathaway Inc. announced that it is buying a majority stake in Pilot Flying J, the truck stop company run by Cleveland Browns owner Jimmy Haslam. Flying J was the source of the fortune used to purchase the football team.
Details of the deal were kept private. We don’t know how much Buffett paid but we know Berkshire acquired a 38.6% equity stake in Pilot Flying J and will acquire a majority stake in the company in 2023 according to the announcement.
In 2023, Berkshire will become the majority shareholder by acquiring an additional 41.4% equity stake; the Haslam family will retain 20% ownership and remain involved with Pilot Flying J.
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The Business of Pilot Flying J
Pilot Flying J, headquartered in Knoxville, Tenn., describes itself as the largest operator of travel centers in North America, operating in 750 locations in the United States and Canada and with $20 billion in revenue. The company employs 27,000 people.
Jimmy Haslam’s father, James. A. Haslam II, opened the first Pilot service station in Gate City, Virginia, on Nov. 20, 1958.
Source: Flying Pilot J
By 1965, Pilot grew to 12 stations in Tennessee, Kentucky and Virginia. The company grew to 59 stores by 1973 and in 1976, it opened its first convenience store. It is now ranked by Forbes magazine as the 15th largest privately held company in the United States.
What Buffett Buys
We know from his annual reports exactly what Buffett is looking for in a deal like the one he completed with Flying J. He publishes his acquisition criteria in the Berkshire Hathaway annual report. This year’s criteria are shown below.
Source: Berkshire Hathaway
We know that financially, Pilot Flying J met the criteria. With an estimated $20 billion in annual sales, the company is large enough. We can then assume it has consistent earnings power and that the price is right.
Conclusions About the Industry
Flying J operates travel centers which include fuel stations, convenience stores and trucker services. There are some arguing that these businesses have a limited future since driverless vehicle technology is going to replace the truck driver. Based on Buffett’s long term commitment, he disagrees.
This is an interesting insight into the truck stop industry and the future of the technology. Buffett has already committed to an additional investment in 2023. He obviously believes trucks will still need drivers at that point in time. This tells us that driverless technology is not imminent, in his opinion.
While Buffett says that he avoids technology as an investment, he doubtlessly has access to some of the best technology experts in the world, if he chooses to contact them. Before committing to this purchase, he most likely did consult with them and determined there is a future for truck stops. (Learn more about How to Trade in Stock Market like Warren Buffets Teacher?)
That tells us we might not want to pay too much for technology companies in this field right now. Breakthroughs are likely to take time.
Other Travel Center Companies
It also tells us we should look at the industry for additional potential buys. There are several publicly traded companies with exposure to this industry.
Among the pure plays is TravelCenters of America LLC (Nasdaq: TA). This company operates and franchises travel centers and convenience store and restaurant locations. The company offers a range of products and services, including diesel fuel and gasoline, as well as nonfuel products and services, such as truck repair and maintenance services, full service restaurants, quick service restaurants (QSRs), travel/convenience stores and various customer amenities. Its customers include trucking fleets and their drivers, independent truck drivers, highway and local motorists, and casual diners.
As of December 31, 2016, the company’s business included 255 travel centers in 43 states in the United States primarily along the United States interstate highway system, and the province of Ontario, Canada. The company’s business also included 233 convenience stores in 11 states in the United States.
Casey’s General Stores, Inc. (Nasdaq: CASY) operate convenience stores under the name Casey’s General Store in approximately 10 Midwestern states, in Iowa, Missouri, and Illinois. The company also operates approximately two stores selling primarily tobacco products. The company operates approximately 1,930 stores, many of which sell fuel in addition to convenience store items.
Casey’s stores carry a range of food, including freshly prepared foods such as pizza, donuts, and sandwiches, beverages, tobacco products, health and beauty aids, automotive products and other nonfood items.
Sunoco LP (NYSE: SUN) is engaged in the retail sale of motor fuels and merchandise through its company-operated convenience stores and retail fuel sites, as well as the wholesale distribution of motor fuels to convenience stores, independent dealers, commercial customers and distributors.
As of December 31, 2016, the company operated approximately 1,345 convenience stores and fuel outlets in over 20 states, offering merchandise, food service, motor fuel and other services.
A less direct trade in the industry is Phillips 66 (NYSE: PSX). Its Marketing & Lubricants division markets refined petroleum products in the United States under the Phillips 66, Conoco, and 76 brands and in Europe through JET and COOP branded outlets. It also manufactures and markets specialty lubricants under the Phillips 66, Kendall and Red Line brand names.
PSX is also involved in transporting and marketing natural gas and refining crude oil and other feedstocks at refineries in the United States and Europe. The company also maintains equity investment in Chevron Phillips Chemical Company LLC which manufactures and markets petrochemicals and plastics.
Comparing the Competition
For investors, the question is whether or not Buffett found the only value in the industry. To begin to answer the question, we can consider the valuation metrics of Pilot Flying J’s publicly traded competitors. This information is summarized in the table below.
The table is surprising and may show why Buffett bought Pilot Flying J. The rest of the industry appears to be struggling.
The P/E ratio is the price to earnings ratio. The P/S ratio is the price to sales ratio. The P/B ratio is the price to book ratio. ROE is the return on equity, a measure of management effectiveness.
TA is a troubled company. Although it trades at a fraction of its book value, the company is not consistently profitable.
CASY could be appealing to aggressive investors. The company could deliver large gains as it moves closer to its book value.
SUN is a limited partnership and earnings are not as important for this type of corporate structure. As an LP, SUN is required to pay out substantially all of its operating earnings as dividends under the tax regulations. This results in a high dividend yield of 10.3% for SUN.
The stock is trading at reasonable valuations based on sales and book value and could be the best choice for income investors.
PSX is an average company and is more of an energy trade than a retailer.
This review shows us that Buffett probably did, in fact, find the best value in the industry.
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