Transcat has had an impressive run over the past six months as its shares have beaten the S&P 500 by 25.9%. The stock now trades at $86.15, marking a 34.3% gain. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Transcat, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is Transcat Not Exciting?
We’re happy investors have made money, but we’re sitting this one out for now. Here are three reasons you should be careful with TRNS, plus one stock we’d rather own.
1. EPS Took a Dip Over the Last Two Years
Although long-term earnings trends give us the big picture, we like to analyze EPS over a shorter period to see if we are missing a change in the business.
Sadly for Transcat, its EPS declined by 11.1% annually over the last two years while its revenue grew by 13.1%. This tells us the company became less profitable on a per-share basis as it expanded.
2. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Transcat historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 7.4%, somewhat low compared to the best industrials companies that consistently pump out 20%+.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
Over the last few years, Transcat’s ROIC has unfortunately decreased. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
Transcat isn’t a terrible business, but it isn’t one of our picks. With its shares beating the market recently, the stock trades at 49.9× forward P/E (or $86.15 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better opportunities elsewhere. We’d recommend looking at one of our top software and edge computing picks.
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