Pat McKeough recently replied to an Inner Circlememberlooking for an opinion on the parking facilities manager. The company’s strong brand helps protect its stable revenue, says Pat. But SP faces increased competition.
Q: Pat: Can you give me your opinion of SP Plus, listed on Nasdaq? Thanks.
A:SP PLUS CORP. (symbol SP on Nasdaq; www.spplus.com) is the largest provider of parking services in the U.S. It also operates in Canada and Puerto Rico.
The company’s Urban division (70% of revenue) operates about 3,700 parking facilities for a total of 2.0 million parking spaces, spread across hundreds of North American cities. That includes parking-related shuttle bus operations.
SP Plus operates about 81% of its locations under management contracts. Clients include universities, hospitals, local governments, shopping centres and hotels. Under a management contract, the company receives a base monthly fee for managing the facility, and it may also get an incentive fee for helping the facility achieve performance targets. Typically, however, all of the underlying revenue and expenses under a standard management contract flow through to the owner of the property rather than to SP Plus.
The remaining 19% of the company’s locations are operated under lease contracts. Under a lease, SP Plus generally pays the property owner a fixed annual rent or a percentage of gross customer collections, or a combination of the two. With a lease agreement, the company collects all revenue and is responsible for most operating expenses. That usually excludes major maintenance costs, capital expenditures and real estate taxes.
SP Plus focuses on management contracts, because they provide steady revenue that’s independent of how busy the parking facility is. However, the company’s leased facilities do provide it with an opportunity to benefit from rising parking fees and SP Plus can further improve profits by cutting costs.
The company’s Airport Transportation business (25% of revenues) encompasses all its services at 70 major airports, including parking and shuttle-bus operations.
SP Plus’s other businesses contribute the remaining 5% of revenue: Its USA Parking System is one of the biggest valet operators in the U.S., with more AAA/CAA four- and five-diamond luxury properties than any other valet competitor; and SP+ Gameday provides a wide range of event logistics services, including bid preparation, event transportation, parking and marketing programs.
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Clients come to Successful Investor Wealth Management for many reasons, but for this one first of all. The portfolios we have managed for our clients over the past 15 years have returned an uncommonly high average of 9.01% net per annum, compounded—after fees are deducted. And we have a simple fee structure, with no hidden costs.
Overall revenue for SP Plus jumped 69.4%, from $953.9 million in 2012 to $1.6 billion in 2015. That’s largely due to the company’s October 2012 acquisition of rival Central Parking Corp. for $147.1 million (including $140.7 million in SP Plus common shares). However, revenue was flat at $1.6 billion in 2016 as new contracts failed to replace expiring deals.
Profits rose by 7.4%, from $17.6 million in 2012 to $18.9 million in 2013. That increase was mostly due to the Central Parking acquisition. Owing to extra shares outstanding, earnings per share fell 15.8%, from $1.01 to $0.85. In 2014, earnings then fell to $0.75 a share (or a total of $16.8 million), before rebounding to $0.98 a share (or $22.1 million) in 2015. Profits reached $1.32 a share (or $29.8 million) in 2016.
SP Plus ended 2016 with cash of $22.2 million, or $0.99 a share. Its long-term debt of $174.7 million is a moderate 23% of its market cap.
The company expects its earnings will improve to between $1.55 and $1.65 a share in 2017. The stock has jumped over 56% in the past year and trades at 20.6 times the midpoint of that range.
Outsourced parking is a highly competitive industry. While there are only a few national operators like SP Plus, many local parking-management companies also compete for contracts. In addition, many municipalities and other governmental entities operate their own parking facilities. SP Plus must compete with all of these parking providers for customers as well as qualified employees.
Technological innovations in ride-sharing apps such as Uber and Lyft may cut the long-term need for parking in cities. As well, the rise of parking aggregators—with apps that link customers with the cheapest available parking lots, or with parking spots at individual houses, churches, condos and so on—are also a threat.
Still, stable revenue from the company’s 3,700 parking lots—along with SP Plus’s national reputation—cuts its overall risk.
Inner Circle recommendation: SP Plus Corp. is okay to hold.
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