For beginners, it can seem like a good idea (and an exciting prospect) to buy a company that tells a good story to investors, even if it completely lacks a track record of revenue and profit. But as Peter Lynch said in One Up On Wall Street, 'Long shots almost never pay off.'
In contrast to all that, I prefer to spend time on companies like Transcat (NASDAQ:TRNS), which has not only revenues, but also profits. While that doesn't make the shares worth buying at any price, you can't deny that successful capitalism requires profit, eventually. Conversely, a loss-making company is yet to prove itself with profit, and eventually the sweet milk of external capital may run sour.
How Fast Is Transcat Growing?
As one of my mentors once told me, share price follows earnings per share (EPS). It's no surprise, then, that I like to invest in companies with EPS growth. Impressively, Transcat has grown EPS by 17% per year, compound, in the last three years. If the company can sustain that sort of growth, we'd expect shareholders to come away winners.
I like to see top-line growth as an indication that growth is sustainable, and I look for a high earnings before interest and taxation (EBIT) margin to point to a competitive moat (though some companies with low margins also have moats). Transcat maintained stable EBIT margins over the last year, all while growing revenue 7.2% to US$167m. That's progress.
In the chart below, you can see how the company has grown earnings, and revenue, over time. To see the actual numbers, click on the chart.
Since Transcat is no giant, with a market capitalization of US$170m, so you should definitely check its cash and debt before getting too excited about its prospects.
Are Transcat Insiders Aligned With All Shareholders?
I like company leaders to have some skin in the game, so to speak, because it increases alignment of incentives between the people running the business, and its true owners. As a result, I'm encouraged by the fact that insiders own Transcat shares worth a considerable sum. To be specific, they have US$12m worth of shares. That's a lot of money, and no small incentive to work hard. Those holdings account for over 7.2% of the company; visible skin in the game.
It's good to see that insiders are invested in the company, but are remuneration levels reasonable? Well, based on the CEO pay, I'd say they are indeed. For companies with market capitalizations between US$100m and US$400m, like Transcat, the median CEO pay is around US$1.2m.
Transcat offered total compensation worth US$959k to its CEO in the year to March 2019. That seems pretty reasonable, especially given its below the median for similar sized companies. CEO compensation is hardly the most important aspect of a company to consider, but when its reasonable that does give me a little more confidence that leadership are looking out for shareholder interests. It can also be a sign of good governance, more generally.
Does Transcat Deserve A Spot On Your Watchlist?
Given my belief that share price follows earnings per share you can easily imagine how I feel about Transcat's strong EPS growth. If that's not enough, consider also that the CEO pay is quite reasonable, and insiders are well-invested alongside other shareholders. Each to their own, but I think all this makes Transcat look rather interesting indeed. Of course, just because Transcat is growing does not mean it is undervalued. If you're wondering about the valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Although Transcat certainly looks good to me, I would like it more if insiders were buying up shares. If you like to see insider buying, too, then this free list of growing companies that insiders are buying, could be exactly what you're looking for.
Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.