Foolish Forecast: TransAct Is Back

My, how time flies. It seems like it was less than two months ago that ex-Motley Fool Hidden Gems pick TransAct Technologies (Nasdaq: TACT  ) was reporting its Q4 2005 results. And already on Monday, the company will be back regaling Wall Street with its Q1 2006 numbers.

What analysts say:

• Buy, sell, or waffle? A lone analyst still follows TransAct, and still with a buy rating.
• Revenues. That analyst expects a real, honest-to-goodness turnaround tomorrow, predicting that sales will rise 25% against last year's Q1, to $15 million.
• Earnings. The analyst predicts that profits will more than triple, to $0.07 per share.

What management says:
As impressive as the above numbers sound, TransAct disappointed the Street with its last round of earnings news, missing both sales and profits estimates by a wide margin. CEO Bart Shuldman described the company's woes thusly: "2005 was a difficult year for TransAct, especially in our gaming and lottery business." But he also promised to "put TransAct on track for a return to improved growth and profitability in 2006" by, among other things, doubling the size of the sales force.

What management does:
2005 was indeed "a difficult year," as the margin trends below reflect. Gross margins contracted, and selling, general, and administrative costs surged, magnifying the impact of the gross margin erosion on operating and net profitability. Even before the collapse in rolling net margins caused by last quarter's net loss (caused by restructuring costs and other "one-time" items), TransAct had been losing profitability all year long.

Margins %	9/04	12/04	3/05	6/05	9/05	12/05
Gross	35.1	36.8	35.7	34.8	33.1	32
Op.	12.8	14.3	11.8	8.8	5.6	2.2
Net	7.1	9.1	7.5	5.7	4	0.7

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.

One Fool says:
Over the last six months, TransAct saw its revenues decline 11% year over year, while profits declined 100%. However, it's important to keep in mind that those are only "accounting profits" -- the numbers TransAct reports under generally accepted accounting principles. The actual "cash profit" situation wasn't nearly so bad. Free cash flow fell to $2.9 million for the last six months, which was only a 3% decline. If the company can keep the cash rolling in while it restructures its business, preventing liquidity concerns, and if sales do improve as forecast by both the analyst and the company, TransAct could well pull out of its tailspin yet.

Competitors:

• GTECH (NYSE: GTK  )
• Hewlett-Packard (NYSE: HPQ  )

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Fool contributor Rich Smith does not own shares of any company named above.