Foolish Forecast: Central Parking
June, 2006Rich Smith of The Motley Fool (www.fool.com) comments on Central Parking:
You'd think one of the easiest companies on the planet to predict earnings for would be a parking business. The number of parking spaces stays pretty much constant. Barring layoffs or Major League Baseball strikes, you'd expect the number of commuters or sports fans parking in those spaces would also be pretty predictable. And yet, somehow, analysts for Central Parking have been totally, wildly off the mark in predicting the company's earnings in each of the last two quarters - off 240 percent to the low side last quarter, 32 percent to the high side the quarter before that. ...
In the analysts' defense - and management's critique - it's not just Wall Street that lacks a firm grasp of Central Parking's business. Last quarter, CEO Emanuel Eads said: "Earnings from continuing operations for the first quarter of fiscal 2006 exceeded our expectations." Eads also explained just why it is that the company's profits make such wild swings. Simply put, the company is less of a "toll booth," collecting steady streams of cash in exchange for a mandatory service, and more of an arbitrageur, making "opportunistic property sales" when appropriate and pocketing the resulting profits.
Meanwhile, back on the ordinary-course-of-business side of the business, Eads noted that Central Parking continues to close "low-margin and unprofitable locations" as part of an "initiative to improve profit margins."
So far, not so good. Gross margins have continued to slide over the last 18 months, down 180 basis points at last count. Operating margins are down more than half over the same period. Only in the rolling net margin do we see improvement, where $61 million worth of gains from asset sales over the last year have done wonders for the firm's bottom line.
Hefty profits from asset sales aside, taken as a whole, I still consider Central Parking to be a company that can't translate its sales into a good business. All the sales have had little positive impact on the firm's balance sheet, which still bears $187 million worth of net debt (cash and equivalents minus long-term debt).
And leaving aside the $86 million in cash income yielded by those assets over the last six months, the parking business still has a solid negative cash flow, with free cash outflows exceeding $16 million over the period. This is just one Fool's opinion, and take it for what it's worth, but I really think this is no way to run a toll booth.
Fool contributor Rich Smith does not own shares of any company named above.