The days of dropping nickels into slot machines and being rewarded by the "cha-ching" ring of hundreds of coins may soon be a thing of the past. Hidden Gems recommendation Transact Technologies (NASDAQ:TACT), supplier of transaction printers that provide receipts, coupons, and tickets for restaurant kitchens, banks, and -- you guessed it -- casino slots, is on a mission to make sure it happens sooner than later.
Investors are taking notice -- in a little more than a month the stock has risen from $15 to Tuesday's close of $29. The sharp appreciation over the past several weeks is likely a result of multiple factors: a deal that folded caused an overreaction that dropped the stock to recent lows, an analyst initiates coverage declaring it a "Buy," it received a patent notice for its printer stacker, and the company became a new listing on the Nasdaq. Include the general buying on the market, and it comes close to adding up to a 93% gain.
There is one other ingredient playing an important role. In its second quarterly report, Transact raised its earnings guidance to $0.55 per share and declared that the fourth quarter will be its strongest quarter. Knowing the weakest quarters are behind and the strongest quarter is on the horizon, savvy investors began rapidly accumulating shares.
If you bought at its recent low, 93% later, it may look like a good time to lock in gains. Is it time to fold or hold? Let's look at a couple of negatives. Between Seiko-Epson (OTC BB: SEKEY.PK) and Hewlett- Packard (NYSE:HPQ), among a list of others, the competition in this market is fierce. However, Transact has wisely partnered and exchanged patents with both of these companies, allowing it to offer a competitive product. To differentiate itself from the pack, Transact is hoping to be the one-stop shop for businesses in need of transaction printers.
Another possible negative is its valuation. While it is not overpriced it certainly isn't the bargain it was a month ago. Its equity value (EV) of $283 million is priced 46 times its structural free cash flow (SFCF) at a run-rate of $6.1 million -- roughly equivalent to its projected growth rate. It's important to note that this is a young company with no debt, possessing a product line that is primed and ready to take advantage of the point-of-sale and banking sectors, as well as gaming and lottery, and is able to tap into a continuous revenue stream via its printer cartridges. Transact's best days are to come.
Transact Technologies may not be the deal it was a month ago, but given its valuation and its position in an emerging market, it's hardly overpriced. This is one hot ticket that is worth cashing in at a later date.
Fool contributor Jeremy MacNealy is kicking himself for not buying Transact at its recent low. He does not own shares in any of the companies mentioned.
