Transcat Inc. - TRNS
Added week and acquisitions overshadow underlying weakness in the business.
I tend to look askance at companies that are serial acquirers of other businesses, which just happens to be the business model for the folks over at Transcat Inc (TRNS). While sometimes this strategy can serve to increase margins by removing competitors that are being aggressive with pricing or perhaps threatening a profitable line of business, typically they are done (at least in my experience) to mask some underlying weakness happening elsewhere inside the company. Yesterday the market reacted very positively to Transcat’s year-end Q4 and FY 2024 earnings and revenue release, but there are some causes for concern in those numbers which I believe investors may be overlooking.
Transcat Inc. (TRNS - $142.18)
Shares Outstanding: 9.2M
Every so often I stumble across a good, solid, but low-growth company that for some bewildering reason is trading for an astronomical valuation, and Transcat certainly fits into that mold. Trading for close to 90x trailing GAAP earnings, 60x “adjusted” earnings, or even 30x “adjusted” EBITDA, this little renter, distributor and servicer of advanced measurement devices (think oscilloscopes, calibrators, and a variety of testing equipment) has found a way to combine a premium valuation together with declining mid-single-digit organic growth into a valuation that few other companies ever manage to achieve. A few years back I was busy pointing out a variety of similar issues (including an insane valuation) at beloved American consumer products company WD-40 years before the current crop of activist investors picked up on the story, and it was all to little or no avail. WD-40’s valuation was stretched back then, and it continues to defy the naysayers today, which is one reason I choose to ignore stories where valuation is the main driver of the thesis because sometimes investors just don’t care. So how about TRNS and why should it be any different?