- After a heavy sell-off earlier this month an underfollowed microcap, TransAct Technologies, is now on sale.
- Recent selling can be attributed to the market's misunderstanding of the company's product cycle and investments in new sectors of business.
- TransAct is debt-free and offers investors a dividend yield over 4% which has been increased twice since being initiated a year and a half ago.
- Management has also recently engaged in massive share repurchases, with a new $7.5 million share repurchase program announced producing an extremely favorable Total Shareholder Return profile.
- Investors at current prices stand to benefit over the next year from the company's investment in new product deployment and will enjoy higher per share earnings due to share repurchases.
What A Difference A Year Makes
Value investors often have a reputation as being methodical, boring, extremely risk averse and given to bargain hunting. While each Value Investor sees value in different places and in different ways, many are drawn to companies that have no debt because, to paraphrase the late and great Walter Schloss, "if you buy a company that does not have any debt, then you don't have to worry about paying it off."
One debt-free company that I have been following for the past year has been TransAct Technologies (NASDAQ:TACT), a company that produces specialized printers for various niche markets. While the printing business is not what it used to be, TransAct Technologies occupies several attractive (and specialized) niches in the sector that make the company more durable than more mainstream competitors.
Around a year ago, I first established a position in TransAct Technologies when it was trading at around $8 per share because I found the company's balance sheet and dividend yield to be attractive and was encouraged both by the company's exposure to niche markets and efforts to innovate and expand into new areas of specialized printing.
When I purchased my shares, I was content to hold onto my position for a long time as I believed that the company would gradually grow organically...that is until my shares appreciated upwards over 60% in under six months and I forced myself to sell. A decision, which in retrospect, was the right move - as the old saying goes "there are no bad companies, just bad prices."
Now, once again, TransAct Technologies is currently being offered to investors at a compelling valuation. The company still has no debt, is trading at under twice book value (a barometer I utilize when evaluating debt-free companies), offers a dividend yield over 4% that has been increased twice since it was initiated a little over a year ago in addition to something extra for investors focused on the metric of Total Shareholder Return.
What the Company Does
TransAct Technologies produces specialized printers and printer accessories that are designed to serve the food service, banking, gambling, medical, emergency response and oil and gas industries. The company also sells replacement parts and consumable items including toner, specialized paper and ink cartridges through its service segment, a business model akin to the extremely successful "Razor and Blade" approach - where an "anchoring" item is sold that is responsible for creating a recurring stream of revenue over the life of the product.
As any investor who has gone through the pain of purchasing toner or ink cartridges can tell you, maintaining your printer can be quite an expensive proposition. Readers who wish to find out more in depth information about TransAct Technologies business can also reference my first article about the company found here.
The Numbers on Transact
With a market capitalization slightly over $60 million, the company is tiny. Currently priced at $7.42 per share against $3.87 of book value per share and carrying no debt, the company has a strong balance sheet and is trading at slightly under twice book. Insider ownership in the enterprise is also significant, currently standing at 12.5%. For investors concerned about income, TransAct also sports an attractive dividend yield of 4.3% with a payout ratio of .58 that has increased from six to eight cents per share on a quarterly basis since being instituted in November of 2012.
The company has also regularly repurchased shares, reducing the float of the company from 11 million shares outstanding to 8.3 million shares outstanding, with open market repurchases occurring at prices ranging between $7 and $8 per share, investors are poised to benefit significantly in the near future (something I will discuss in depth later in this article).
Why the Recent Decline?: A Question of Lumpy Revenue
One of Warren Buffett's most famous philosophies regarding average returns for companies is a preference for a "lumpy" return for a business that does an average of 15% annually when compared with a more steadily performing company that does 10%. The reason underlying this preference is simple: over the long haul, compounding will do more work if a company can, on average, return 15% on a consistent basis. Under this approach, periods of "lumpy" performance can be tolerated and in many cases are welcomed as they often present a buying opportunity to investors who are able to understand the reasons behind the market punishing shares.
In the case of TransAct Technologies, I believe that the market has unfairly punished the company due to a misunderstanding surrounding the company's most recent earnings discussion, where the company posted weak earnings on a per share basis, earning 2 cents per share vs. 12 cents per share during the same period in 2013.
Despite the fact that Transact's earnings appeared to be anemic at first glance, I believe that investors who retain a long-term orientation and are paying close attention to the operations of the company will have noticed several encouraging items in the management's most recent discussion of earnings that indicate the company has a bright future ahead of it.
The first important data point is that the company is in the process of introducing new products into the markets it serves through the development of and integrating the company's recently acquired Printrex division (a line of specialty printers designed to aid in Oil & Gas exploration).
The Printrex segment of the company is one that is in the process of experiencing significant growth, with the company's "[services segment reporting] a 73% increase in Printrex-related consumables and higher sales of spare parts and accessories...[this increase was] more than offset by a decline in HP inkjet cartridge sales due to year-over-year declines in the company's installed base as well as lower service revenue."
Though the company's services division reported a lower net income this quarter, which declined to $3.1 million from $3.5 million, investors must be aware of the fact that the company's recently acquired Printrex segment is not only growing quickly, but also is utilizing proprietary parts and cartridges that have been developed by TransAct instead of another supplier (in this case, HP).
While the company has been experiencing a decline in HP inkjet cartridge sales as the company's installed base of Printrex printers continues to grow, TransAct will benefit considerably through the sales of its own proprietary products over a longer time horizon (Discussed by management on page 11 of the company's most recent 10-K), as the replacement cycle, responsible for driving the revenues of the company's TransAct Services Group segment, lags the sale and installation of new printers.
Two Massive Share Repurchases in Two Years: Mr. Market Is Letting Management Give the Company Back to Shareholders
Share repurchases are often viewed with skepticism by many investors for good reason, as many companies have a propensity to engage in share repurchases at times when the company's stock is overvalued and nears all-time highs, thus often destroying value when shares are repurchased instead of investing in expansion, reducing debt or increasing dividends.
In the case of TransAct Technologies I believe that the exception is the rule and, in my opinion, the company has been displaying a prudent pattern of engaging in significant repurchases when share prices are low, thus improving the per-share profitability of the company for existing shareholders and improving the overall capital return profile of the company from a Total Shareholder Return basis (which is measured by the percentage of the company's stock repurchased during a period plus dividends paid out).
Over the past year and a half, TransAct technologies has announced two substantial share repurchase programs. In the latter half of 2013, TransAct Technologies repurchased just under half a million shares (close to 5.6% of the company's float) on the open market at an average price of $8.75 - at a price approximately 17.9% higher than the current market price.
After the company's drawdown of over 20% after its earnings announcement earlier this month, I believed that it was very likely that TransAct would seek to repurchase more shares (due to the fact that the company has no debt to use cash on its balance sheet to retire), particularly since the company had also increased its dividend from .07 to .08 cents per quarter and currently has a balance of $5.1 million of cash and cash equivalents.
I was quickly proven right, with TransAct authorizing a $7.5 million share repurchase program which translates to slightly over 1 million shares at current market prices, or 13.5% of the total outstanding float of the company. Add that 13.5% to the company's current dividend yield of 4.3% and investors are looking at a Total Shareholder Return profile of 17.8% just from dividends and repurchases should the company repurchase shares around these prices over the next year.
Why TransAct Technologies is Once Again Attractive
After TransAct's earnings announcement, I seized upon the opportunity to purchase shares of the company in the mid and low $7 range. Not only had the company increased its dividend from the time I established my first position one year ago, there are also fewer shares outstanding (and I believe that it is likely that there will be fewer shares) and I was able to purchase shares in the company for less than I had initially.
I believe that TransAct Technologies is once again attractive to investors at current prices due to several factors including the fact that the company is positioned to realize significantly improved earnings in 2015 as a result of its marketing and new product development efforts including the development of a new food label printer as well as the increasing penetration of the company's Printrex brand into the Oil & Gas exploration market. Management has also repeatedly guided shareholders to expect the company's product replacement cycle for the Printrex brand will occur in 2015 and thus lead to increased earnings power (as the purchase of high margin consumables for the Printrex line of printers will drive earnings and can only occur after enough hardware has become established within the market).
I also believe that the company's management has also taken proactive steps to reward shareholder through extremely shareholder-friendly measures including the recent authorization of a significant share repurchase program, maintaining a strong, debt-free balance sheet in addition to an attractive and growing dividend yield.
Despite the fact that TransAct Technologies does not carry any debt, there are some risks that investors must be appraised of. The first is that the company is currently engaged in the final phases of a lawsuit with the Avery Dennison Corporation (NYSE:AVY) relating to TransAct Technologies EPICENTRAL line of printers, which Avery Dennison alleges was produced with the help of a former Avery Dennison executive who joined TransAct Technologies.
While Avery Dennison is currently seeking an injunction on the sale of this line of TransAct Technology printers, the courts have favored TransAct Technologies in the past and Avery Dennison is currently in the final stages of appealing a judgment handed down in favor of TransAct Technologies which is scheduled to be heard in April of 2015.
Another area of risk that investors must be aware of is the fact that a significant portion of the company's business is with a single customer, Gtech SPA, formerly known as Lottomattica. This portion of TransAct Technologies business is related to the manufacture and sale of lottery ticket printers and is set to expire at the end of 2014. Gtech SPA, according to the company's most recent 10-K, accounted for 12% of the company's net sales for the most recent year. While I believe that Gtech SPA will renew its contract with TransAct Technologies, investors must be aware of the possibility that Gtech SPA will not elect to renew their contract.
Another important of risk for investors to consider is that TransAct Technologies is has sales currently heavily concentrated in one sector, gaming, with over 40% of the company's net sales being derived from sales to casino's and related operations (including racetracks). Though the company has been investing significant resources to diversify its revenue mix through their recent Printrex acquisition and development of new food safety and point of sale terminals, it is important for investors to understand that the company could potentially be vulnerable to a sharp decline in the broader gaming industry.
A final risk that investors must be aware of is the fact that liquidity is a significant issue for small companies of this nature and that the bid/ask spread could vary wildly on a day-to-day basis, for this reason I believe that investors must be careful about establishing and liquidating positions and should stagger their purchases over a period of several days in order to mitigate the potentially significant swings in share price that could occur.
I believe that shares of TransAct Technologies represent an attractive purchase to investors at current prices for a variety of reasons. After being punished (in what was, in my mind, an unfairly harsh sell-off), I believe that investors now will not only enjoy an above average dividend yield of over 4% but also stand to benefit from near-term price support as I believe that it is likely the company will conduct open market share repurchases at current price levels which should in turn produce higher earnings per share in the future.
Over the long term, I believe that it is likely investors will have the opportunity to both enjoy increased earnings power as the company's products complete their introduction cycle to the marketplace as well as an increase in per-share earnings quality after the company conducts share repurchases.
Currently I believe that TransAct technologies offers investors an attractive blend of growth potential, value, yield and safety that make the company an attractive investment suitable for long-term holding. While I typically do not set a price target for companies that I examine, I believe that investors will be reasonably certain to enjoy higher earnings in 2015 from this company through a combination of increasing market penetration of the Printrex line of products and the likely repurchase of a significant amount of shares, with the outside possibility of further dividend increases thrown in as well.
Editor's Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.