It sure has been an interesting ride for investors who put their chips down on Hidden Gem recommendation TransActTechnologies (NASDAQ:TACT). If you're wondering whether this is actually a slot machine posing as a stock, then you may be hoping that it comes with one of TransAct's printers. Its printers can be found in a number of the other 700,000-plus slot machines found in U.S., many of which are being transitioned to the coinless variety -- also know as ticket-in-ticket-out.
The company released its third-quarter results after the market closed yesterday and cashed out with an EPS of $0.15 per diluted share -- a 50% increase over the prior-year period -- and gross margins up to 38% from 32% in the prior year. But a look back at second-quarter results shows that this quarter had only a penny increase in diluted EPS and gross margins had already reached 38%. So we didn't see the sequential growth that may have provided some ballast to a stock trading at a trailing P/E of more than 70. A lack of improvement over last quarter may have been anticipated after the company called off its acquisition of rival TPG at the end of July. Investors didn't like the odds, and the stock plunged from $24 to $15 within a couple of weeks.
But don't fold your cards yet! The skepticism wasn't long-lived as shares quickly rose again and closed yesterday at $25.20. So did investors make the right bet that a slip in performance was not in the cards? Compared to last quarter, net revenue increased 5.4% to $15.5 million at the same time that inventories decreased $0.2 million to $8.5 million. Full-year 2004 EPS guidance was raised only a penny, but this includes one-time higher costs for compliance with Sarbanes-Oxley. The company also announced a new business structure, dividing the core business into three areas -- POS and banking, gaming and lottery, and the TransAct Services Group. The split should benefit the company -- and investors -- by allowing for better tracking of the separate core areas of the company.
A number of businesses are moving toward using the technology TransAct provides with its printers. Casinos like the increased efficiency of slot machines using the ticket-in-ticket-out technology and are finding that most players embrace the change. Banks may quickly discover that the printers will help in their transitions to compliance with Check 21, which just went into effect yesterday. Both banks and casinos will be able to take advantage of the ability to target advertising to their individual customers. Gaming and lottery growth is where profits are coming from now, but significant penetration into the banking industry could make this Gem a multi-bagger over the next few years.
Read Rich Smith's take on the failed TPG acquisition here.
Increase your odds of hitting the stock jackpot and check out a free trial of the Hidden Gems newsletter . You'll even get a chance to share your winnings on the community message boards. John Bluis does not own any shares of TransAct Technologies.
