TransAct Looking To Print More Cash Flow

By Ryan C. Fuhrmann | March 03, 2012 AAA

TransAct Technologies (Nasdaq:TACT) sells printers and related supplies to a diverse and growing set of customers in differing industries. Its sights are firmly set on the gambling space, and though it has posted three years of solid sales and earnings trends, its cash flow production is much more mixed.

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Full Year Recap
Sales improved a modest 4.4% to $66 million. TransAct breaks its sales into five different categories and reported a mixed bag of divisional trends. Lottery-based sales growth was the most impressive, jumping 83.4% to $14.9 million, or roughly 22.5% of total sales. The laggard was in the banking and point-of-sale category that logged a 31.6% decline to $10 million, or about 15% of sales. Both the casino and gaming, and TransAct Services Group logged roughly 3% top line declines to weigh in at 38 and 22% of sales, respectively. The final new category was Printrex, a specialty printing company it acquired during the year. It reported $1.7 million in sales to account for the remaining roughly 3% of total sales.

Minimal 1.7% cost of sales growth sent gross profit ahead by 9.2% to $24.6 million. Operating expenses rose 5.7% to outpace sales growth, but included a $184 million restructuring charge. Still, operating income jumped 19.2% to $7 million, or 10.6% of sales for a healthy net profit margin. This worked out to 49 cents per diluted share. Free cash flow came in at roughly $1.5 million to lag reported net income by a fairly wide margin.

Outlook and Valuation
For 2012, TransAct said it expects a vast improvement to free cash flow to "at least" $7 million, or roughly the 49 cents per diluted share it reported as earnings for 2011. Analysts currently project sales growth in excess of 6%, total sales of $70 million and earnings of 60 cents per share.

This puts TransAct's forward P/E in reasonable territory at 9.7. The forward free cash flow multiple is slightly less compelling at closer to 14. A comparable firm is Zebra Technologies (Nasdaq:ZBRA), which trades at a forward earnings multiple of 14.5. Other more general printing rivals include Lexmark (NYSE:LXK) and Canon (NYSE:CAJ) that trade at 7.7 times and 18 times, respectively.

The Bottom Line
TransAct is focused on building out its capabilities in the United States' casino market, though the Printrex purchase added some diversification into serving the oil and gas market. And despite the casino focus, sales fell for the year, though this was due to lower sales in Italy. Adding to the capabilities for domestic gaming operators such as MGM Resorts (NYSE:MGM) continues to hold promise as TransAct can print targeted coupons and specials on slot machine receipts and payment tickets.

Despite the potential and reasonable valuation, TransAct remains a work in progress in terms of posting consistent and growing cash flows. The sales and earnings trends are there and have risen steadily since the global economy started recovering in 2009. 2012 could mark a solid year of free cash flow generation, according to management's guidance.

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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

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