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Transcat (NASDAQ: TRNS): Significant percentage in Minerva Advisor’s portfolio & signs of moat

by | Oct 9, 2019

 

Basics

M. Cap: $190 million

Transcat, Inc. (Nasdaq: TRNS) is a leading provider of accredited calibration, repair, inspection and laboratory instrument services.

Minerva Advisors LLC

  • The top five stocks account for 34% of the total portfolio.
  • Transcat accounts for 5.46% of the total portfolio – Rank #4

Sign of Moat

I. Service segment

The company provides accredited calibrations to customers in highly-regulated targeted market segments.

a) Calibration service is critical, recurring and has a high margin

The calibration process is critical to ensure that test equipment is operating according to specifications. The company’s target customers usually operate in regulated environments like life sciences and aerospace, which require calibration services on a regular, recurring basis, and where the cost of failure is very high.

This segment is supported by a recurring revenue stream. This segment maintains high margins and an inherent operating leverage.

b) Market share

Out of the $1.4 billion calibration service market, 41% is controlled by 3rd party service providers. Transact enjoys a 17% market share of the 3rd party service segment.

c) Proprietary software

  • CalTrak® is a proprietary documentation and asset management software that is used to integrate and manage both the workflow of the company’s calibration service centers and its customers’ assets.
  • C3® provides its customers with web-based asset management capability and a safe and secure off-site archive of calibration and other service records that can be accessed 24 hours a day through a secure password-protected website.

The company believes that its proprietary software, CalTrak® and C3®, is a key differentiator from its competitors and provides a competitive barrier.

d) Consistent revenue growth

  • The company’s service segment has shown consistent revenue growth over the past several years, ending fiscal year 2019 with its 40th consecutive quarter of year-over-year growth.
  • In 2018, the organic revenue growth was 6.1%.

Overall, the company believes that the service segment will be the primary source of revenue and earnings growth in future fiscal years.

II) Distribution segment

The company sells and rents professional-grade handheld test and measurement instruments.

This segment can be heavily impacted by changes in the economic environment. As customers increase or decrease capital and discretionary spending, sales will typically be directly impacted.

Letter from the CEO

Dear Shareholders,

Solid execution of our strategic plan delivered another record year for Transcat. We continued to capitalize on the complementary nature of our Service and Distribution segments to drive growth. And, we demonstrated the ability to strike an effective balance between executing short-term goals and preparing the business for the long-term. In addition to generating record levels of revenue and earnings, we fortified our infrastructure and made significant progress in improving the functionality of many of our critical systems.

Highlights of FY 2019

  • Record revenue of $160.9 million, driven by strong Service organic growth of 8.6%
  • 40 consecutive quarters of year-over-year quarterly Service growth – that’s 10 straight years!
  •  Another year of margin expansion for Distribution as the combination of pricing optimization and higher margin mix drove an increase in gross and operating margins on slightly less volume.\
  • Consolidated operating income up 13% to $10.2 million, while operating margin expanded 60 basis points to 6.4%
  • Net income growth of 21% to a record $7.1 million, or $0.95 per diluted share
  • Adjusted EBITDA* increased 9% to $17.8 million and as a percentage of revenue was up 50 basis points to 11.1%
  • Generated strong cash from operations of $12.6 million, an increase of 27%, which was used to fund acquisitions, drive our operational excellence initiatives and reduce debt
  • Acquisition strategy strengthens value proposition and positions Service segment to generate expected double-digit growth into the future

Acquisitions are an important part of our strategy and, combined with our healthy, organic Service pipeline, we expect to drive double-digit Service growth into the future. We completed two acquisitions during the past fiscal year and one at the start of fiscal 2020. Two acquisitions were small bolt-ons that added unique capabilities to our current scope of services, while the third, Angel’s Instrumentation, expanded our geographic footprint in Virginia and added expertise in the adjacent maritime calibration market. We continue to believe we have sufficient liquidity and are well positioned for any investment opportunities that meet our strategic criteria.

Calibrated by Transcat®

We introduced a new logo and tagline in support of our differentiated brand that has been established over the past several years. Simple, clear and concise, the logo is synonymous with our mission to ensure compliance, control and risk reduction in highly regulated industries, such as life science and aerospace. We aim to make the phrase commonplace in the calibration industry and to hear people ask, are your instruments “Calibrated by Transcat®?”

Meaningfully improve our Service margin profile over time

Process improvement and automation will be major elements that define the future of Transcat. While we are still early in the process, we have made good progress and believe we are doing the right things to drive growth and margin improvement. We are focused on improving the recruitment, onboarding and training of new technicians in order to support strong organic growth, driving process improvement throughout the entire organization and launching automation through our network of calibration labs.

We strongly feel the long view on Transcat remains very compelling and we are confident in our ability to continue executing well and expect to reach another record year in fiscal 2020. On behalf of the Transcat Board and employees, thank you for your continued interest and investment in Transcat.

Lee D. Rudow
President and Chief Executive Officer
July 25, 2019

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