Receipt-printer maker and ex-Hidden Gems recommendation TransAct Technologies (NASDAQ:TACT) has had a rough year of it so far. Its sales are down 15% year to date against the first nine months of 2004, and its profits have fallen 75%. The company promised to begin turning things around in the fourth quarter, as gross margins begin to firm up on its new casino ticket printer. But can TransAct close the deal? Tune in tomorrow evening to find out.

Wall Street Wisdom:

  • General consensus. Only one analyst follows TransAct, rating the stock a buy.
  • Revenues. This analyst predicts a 4% rise in quarterly revenues to $15.25 million.
  • Earnings. Profits aren't expected to improve at all, however. The estimate is that TransAct will report another 75% decline to $0.02 per share.

Margin watch:
 Margins tell the story of TransAct's struggles. Although gross margins haven't suffered much on a rolling (i.e., trailing-12-month) basis, operating margins have been cut in half, and net margins are down by more than a third.

Margins %

6/04

9/04

12/04

3/05

6/05

9/05

Gross

33.5

35.1

36.8

35.7

34.8

33.1

Op.

12.1

12.8

14.3

11.8

8.8

5.6

Net

6.3

7.1

9.1

7.5

5.7

4.0
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

Foolish forensics:
The reason for the company's struggles: lax cost controls. Although sales have been falling over the past year relative to the year-ago numbers, someone forgot to tell TransAct's HR and marketing departments -- because selling, general, and administrative (SG&A) expenses are still going up. Unless TransAct can get its costs under control, the company can firm gross margins all it wants, but profits are still going to look bad in comparison to past performance.

What's more, the accounting profits numbers don't tell the full story of how bad TransAct has it. Under GAAP, the company was able to report $2.2 million in profits over the past four quarters. But on a cash profits basis, the company generated just $1.2 million in free cash flow.

Valuation metrics:
If you thought TransAct looked expensive at a trailing P/E of 47, look again. At a price-to-free cash flow ratio of 80, it's doubly so.

Investors should keep an eye on those escalating SG&A costs. If the company does get those under control, look for a much-needed improvement to free cash flow.

Are you interested in other small-cap companies? Take the Motley Fool Hidden Gems newsletter service for a 30-day free spin.

Fool contributor Rich Smith has no interest, short or long, in TransAct.