When it comes to science, accuracy is imperative. Even a slight deviation can have disastrous consequences.Given the importance of ensuring accuracy, investors should not be surprised will be an entire company dedicated to providing calibration services and other related services and products involving test, measurement and control instruments.One such business that investors should be aware of is transport company (NASDAQ: TRNS). The company has grown its revenue and profits on a fairly steady basis in recent years. It’s certainly not a fast-growing business, but it’s a healthy one. Unfortunately, though, the company’s stock does look a bit expensive right now. Because of this, I cannot rate it a “hold”. But things could turn around if shares fall sharply from here and/or if we see a nice pickup in growth.
accuracy is everything
As I have already mentioned, Transcat is dedicated to providing calibration services and performing other related activities in test, measurement and control instruments. For the most part, the company focuses on providing services and products to highly regulated industries such as the life sciences space. This includes pharmaceutical, biotech, medical device and other related companies. But it should be clear that the company’s focus isn’t just in the medical space. It also serves other highly regulated industries such as aerospace and defense industrial manufacturing markets, energy and utilities.
Operationally, Transcat operates through its two operating divisions. The first of these is the Service Division, through which calibration, repair, inspection, analytical qualification, preventive maintenance, consulting and other related services are provided. Most of these activities are handled through its proprietary asset management system, CalTrak, and its online customer portal called C3. The segment currently operates no fewer than 24 calibration service centers in the United States, Puerto Rico and Canada. But it also operates through its own customers’ facilities for long-term contracts if required. Some of this work can also be performed by using the mobile calibration laboratories that the company has in its portfolio. According to the company’s fiscal 2022 figures, this particular segment contributed 59.5% of the company’s revenue and an impressive 66.6% of its profits.
Another segment that the company operates in is known as the distribution segment. This segment is responsible for the sale and rental of national and proprietary brand instruments to customers worldwide. Through its website, inside sales force, and other activities and resources, the company is able to offer its customers more than 150,000 test, measurement and control instruments. This includes products from over 500 leading brands. The company is not limited to selling these products in this segment. Given the highly sensitive nature of the technology it uses, it also calibrates them, if required, at the point of sale and at regular post-sale intervals. Other related services are also provided to customers in need through this segment. Last year, the unit accounted for 40.5% of the company’s revenue and 33.4% of its profit.
While Transcat may not be a fast-growing business, it’s one that continues to grow. Between fiscal 2018 and 2022, the company’s revenue has grown year over year, climbing from $155.1 million to $205 million. The biggest increase in revenue from this business will be from 2021 to 2022, when sales will increase by 18.3% year-over-year. The growth was primarily driven by a 20.5% surge in revenue related to the corporate services segment, a trade mix that management attributed to both organic and acquisition-related growth. Service segment sales growth of approximately $9 million came from various acquisitions, with the remainder attributable to organic means. Meanwhile, distribution growth slowed slightly to 15.1%, but both organic growth and an uptick in acquisition-related activity were positive for the company.
An increase in revenue is usually accompanied by an increase in profitability. Profits have risen each year in four of the past five years, with net income growing from $5.9 million in 2018 to an all-time high of $11.4 million in 2022. Other profitability indicators fluctuated greatly. Operating cash flow was generally up, climbing from $9.9 million to $17.6 million. But the high point is $23.6 million reported in 2021. However, if we adjust for changes in working capital, we see continued expansion year-over-year, with the metric growing from $14.3 million to $24 million over the past five years. Almost the same trend can be seen by looking at EBITDA. Over the past five years, this metric has grown from $16.4 million to $26.3 million on an adjusted basis.
Currently, we also have data covering the first half of fiscal year 2023. Revenues totaled $111.1 million during the period. This is a 13.1% increase from the $98.2 million reported in the same period last year. Services revenue remained the fastest-growing segment of the business, with revenue up 21.1%, compared with a 2.1% increase in the distribution segment. The $6.9 million is an amount related to additional acquisitions made by the company. Meanwhile, the rest of the growth was related to organic activity. While year-over-year revenue growth was decent, the profit figures were somewhat mixed. The decline in margins caused net income to decline from $6.7 million in the first six months of 2022 to $5.4 million in the same period in 2023. Operating cash flow fared worse, falling from $7.5 million to $5.2 million. Fortunately, though, if we adjust for changes in working capital, the metric rises from $12.5 million to $12.9 million, while EBITDA rises from $13.2 million to $14.8 million.
For the current fiscal year, management didn’t really provide any guidance other than to say that revenue growth in the services segment should continue to grow well. If we simply put the year-to-date results together, we should expect net income of $9.2 million, adjusted operating cash flow of $24.8 million, and EBITDA of $29.5 million. Based on these numbers, the company trades at 57.5 times forward earnings. The forward price to adjusted operating cash flow multiple is 21.3, while the EV multiple to EBITDA is 19.6. In the graph above, you can see how that compares to pricing if we use the 2022 data. Meanwhile, in the table below, you can see how the company’s pricing compares to five similar companies. In terms of price-to-earnings ratio, these companies have a price-earnings ratio as low as 2.1 and as high as 62.3. Using the price versus operating cash flow method, the range is from 2.6 to 32.8. In both cases, four of the five companies were cheaper than Transcat. Meanwhile, using the EV to EBITDA approach, the range is from 1.4 to 8.1. In this case, our lead is the most expensive of the group.
|company||price/earnings||Price/Operating Cash Flow||Enterprise value/EBITDA|
|DXP Enterprise (DXPE)||12.9||32.8||8.1|
|Hudson Technologies (HDSN)||4.5||8.1||3.5|
|BlueLinx Holdings Corporation (BXC)||2.1||2.6||1.4|
|Alta Equipment Group (ALTG)||62.3||9.4||7.3|
|Carat Packaging (KRT)||11.1||12.3||6.6|
From the data we have, in my opinion, Transcat is a healthy and growing company that should continue to do well for itself and its investors over the long run. For those with a long-term investment outlook, the company looks promising. Having said that, the business’s stock does look quite expensive on an absolute basis and relative to similar companies. Given the quality of operations and its consistency of steady growth, I cannot in good conscience rate this company a Sell, despite the high stock price. If the stock price falls further, I can foresee myself becoming slightly more bullish on this company. But for now, a “hold” rating seems best to reflect my view that the stock should generate returns that more or less match what the broader market should achieve.