Huge Quarter For TransAct Technologies Only The Beginning Of Corporate Transformation

Summary

• Strategic transition in large addressable market.
• Virtual monopoly in 'back of the office' solution for the restaurant industry in nascent stages.
• Gross margin up significantly leading to near doubling or doubling of operating income, net income and EBITDA.

Stellar Quarterly Results... Just the Beginning

TransAct Technologies (NASDAQ:TACT) is a maker of specialty technology-based printer solutions for the casino/gaming, lottery and restaurant industries. With its stellar Q3 results just released , TACT has now tipped its hat that the company's decision to laser focus on 'back-of the-office' technology solutions for the restaurant industry is just beginning to demonstrate significant traction.

Specifically, the company delivered record quarterly results on both a q/q and sequential basis and which represents the company's best showing as far back as I could find. Gross margin was up 800 basis points q/q to 48.4% leading to a more than doubling of operating income to 2.6 M from 1.2M and EPS doubling to 0.24 from 0.12, well ahead of the analyst estimate of 0.12. In addition, the earnings number was easily the company's largest earnings surprise.

The Focus, The Driver Ad The Tip Of The Iceberg

In the Q3 release, CEO Bar Shuldman described the strategic focus that has been in the works:

TransAct has been focused over the past several quarters on creating a new restaurant solutions market that would provide much needed technology for the back of the restaurant. Leveraging our engineering and manufacturing skills, we developed a full suite of AccuDate terminals, including the AccuDate XL, AccuDate PRO and AccuDate 9700. In addition, we built out an internal direct sales force for our restaurant solutions offerings while maintaining our solid position in the casino and gaming and lottery markets.

'Technology for the back of the restaurant' means utilizing the cloud and automation to run all the things in your restaurant that you'd rather not have to think about which cuts costs and increases profitability. Here are a list of some of the things its newest offering, the AccuDate XL can do:

• Tasks & Checklists: 18 item types with unlimited scheduling configurations, combined with verification capabilities and remote alerts.
• Temperature Recording: Cooper-Atkins Blue2 temperature probe integration.
• Forms & Inspections: For documentation and operations accountability.
• Employee Scheduling: Including labor cost analysis, email and text notifications, and free employee phone app.
• Message Blast: Send bulk emails or text messages to employees.
• Time & Attendance: Time clock with photo capabilities to eliminate buddy punches.
• Employee Announcements: Includes message receipt and offers quizzes to validate employee understanding.
• Logbook & Journal: Operational issues are logged and flagged as necessary.
• Temperature Monitoring: Automated temperature monitoring with remote alerts.

CFO Steve Demartino in the release on how the company's new focus has begun to emerge as a significant growth driver and the view going forward:

“Our investments in the restaurant solutions business have further established our technology leadership position and created a world-class sales team leading to strong 2017 third quarter profitability. Increasing sales of AccuDate terminals contributed to the 27% increase in gross profit driven by a 750 basis point improvement in gross margin to a quarterly record 48.4%. Our expectation for continued momentum in our restaurant solutions terminal sales and for related sales of proprietary labels and services positions TransAct for long-term shareholder value creation."

And the increase in the addressable market opportunity from the CEO on the conference call:

We have a board up in the office which shows the amount of opportunities that the company is working on both by customer name and dollar volume and total dollar volume. And I can tell you that the total dollar volume of the opportunities that the company’s looking at has gone up by probably 10x. And a lot of that started in the third quarter as we had the big (restaurant) show in May, started our direct or our marketing campaign which by the way is a digital campaign now which is not only a great way to inform your customers but it’s not very expensive which is wonderful...

There’s a growing consensus that the technology transformation taking place in the food supply and restaurant business is the biggest opportunity in the restaurant market today, because of the lack of technology...

And basically what you’re going to see in the back of the restaurant, I was talking to some people that are investing a lot of money in this technology movement that’s going on in the restaurant industry and one, they’re just amazed that there’s very little technology in the back of the restaurant. And then they’re also amazed that the size of the opportunity.

Valuation

TACT is a small cap entity in a relatively unexciting industry. Over the last 5 years, its growth on the revenue side has been anemic and has actually decreased. Ditto for its gross margin. If we begin to model increasing sales coupled with an ongoing 50% gross margin, the impact on the bottom line will be significant, much as was seen in the quarter, but to a much greater degree as sales really begin to ramp. Even with the rollout of a dedicated sales force in the restaurant solution, SG&A costs were only up marginally in the quarter. Additionally, the CEO indicated the digital campaign that is creating a lot of new business was 'not very expensive'.

TACT's stock price is up around 50% in the last year, which may seem excessive, but given the fact that it has meaningfully surprised on earnings for the last 3 quarters would account for part of the upside. However, looking at the 5-year performance or longer, the stock has been relatively flat.

The company has no debt, short interest is low at below 1%, has few competitors, high barriers to entrance, signs long-term contracts with its customers, and has recurring service and parts revenues.

Risks

The company has a very low average trading volume and is thus subject to potentially greater volatility. In addition, because of its current size many larger players may steer clear, although it does have 45% institutional ownership.

If the company's new rollout to the restaurant industry stalls then this would certainly put this thesis in doubt.

Conclusion

If TACT's transitional focus, which is now just beginning to emerge, proves to be a very real trend, then the company should be entitled to a revaluation from a boring legacy player in the printing industry to a niche technology solutions market leader expanding in a huge addressable market. Such a scenario would then result in a much higher stock price - potentially doubling within a year.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in TACT over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.