Transcat (TRNS)

Measurement equipment distributor Transcat (NASDAQ:TRNS) beat Wall Street’s revenue expectations in Q1 CY2025, with sales up 8.8% year on year to $77.13 million. Its non-GAAP profit of $0.64 per share was 3.8% above analysts’ consensus estimates.

Company Overview

Serving the pharmaceutical, industrial manufacturing, energy, and chemical process industries, Transcat (NASDAQ:TRNS) provides measurement instruments and supplies.

Supply chain and inventory management are themes that grew in focus after COVID wreaked havoc on the global movement of raw materials and components. Maintenance and repair distributors that boast reliable selection and quickly deliver products to customers can benefit from this theme. While e-commerce hasn’t disrupted industrial distribution as much as consumer retail, it is still a real threat, forcing investment in omnichannel capabilities to serve customers everywhere. Additionally, maintenance and repair distributors are at the whim of economic cycles that impact the capital spending and construction projects that can juice demand.

Competitors offering similar products include Keysight (NYSE:KEYS), Ametek (NYSE:AME), and Fortive (NYSE:FTV).

Examining a company’s long-term performance can provide clues about its quality. Any business can have short-term success, but a top-tier one grows for years. Luckily, Transcat’s sales grew at a solid 10% compounded annual growth rate over the last five years. Its growth beat the average industrials company and shows its offerings resonate with customers, a helpful starting point for our analysis.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Transcat’s annualized revenue growth of 9.9% over the last two years aligns with its five-year trend, suggesting its demand was predictably strong.

This quarter, Transcat reported year-on-year revenue growth of 8.8%, and its $77.13 million of revenue exceeded Wall Street’s estimates by 1%.

Looking ahead, sell-side analysts expect revenue to grow 9.1% over the next 12 months, similar to its two-year rate. This projection is noteworthy and implies the market is forecasting success for its products and services.

Gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor.

Transcat’s unit economics are better than the typical industrials business, signaling its products are somewhat differentiated through quality or brand. As you can see below, it averaged a decent 30.2% gross margin over the last five years. Said differently, Transcat paid its suppliers $69.81 for every $100 in revenue.

Transcat’s gross profit margin came in at 33.6% this quarter, in line with the same quarter last year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs (such as raw materials and manufacturing expenses) have been stable and it isn’t under pressure to lower prices.

Transcat was profitable over the last five years but held back by its large cost base. Its average operating margin of 7.1% was weak for an industrials business.

Analyzing the trend in its profitability, Transcat’s operating margin might fluctuated slightly but has generally stayed the same over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

In Q1, Transcat generated an operating profit margin of 9%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Transcat’s EPS grew at a spectacular 16.2% compounded annual growth rate over the last five years, higher than its 10% annualized revenue growth. However, we take this with a grain of salt because its operating margin didn’t expand and it didn’t repurchase its shares, meaning the delta came from reduced interest expenses or taxes.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

For Transcat, its two-year annual EPS growth of 10.7% was lower than its five-year trend. We still think its growth was good and hope it can accelerate in the future.

In Q1, Transcat reported EPS at $0.64, down from $0.66 in the same quarter last year. Despite falling year on year, this print beat analysts’ estimates by 3.8%. Over the next 12 months, Wall Street expects Transcat’s full-year EPS of $2.29 to grow 13.3%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Transcat has shown decent cash profitability, giving it some flexibility to reinvest or return capital to investors. The company’s free cash flow margin averaged 6.7% over the last five years, slightly better than the broader industrials sector.

Taking a step back, we can see that Transcat’s margin was unchanged during that time, showing its long-term free cash flow profile is stable.

Transcat’s free cash flow clocked in at $7.93 million in Q1, equivalent to a 10.3% margin. This result was good as its margin was 8.1 percentage points higher than in the same quarter last year, but we wouldn’t put too much weight on the short term because investment needs can be seasonal, causing temporary swings. Long-term trends carry greater meaning.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Although Transcat has shown solid business quality lately, it historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 8.7%, somewhat low compared to the best industrials companies that consistently pump out 20%+.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Transcat’s ROIC averaged 4 percentage point decreases each year. If its returns keep falling, it could suggest its profitable growth opportunities are drying up. We’ll keep a close eye.

Transcat reported $1.52 million of cash and $54.1 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $39.73 million of EBITDA over the last 12 months, we view Transcat’s 1.3× net-debt-to-EBITDA ratio as safe. We also see its $1.17 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly Transcat blew past analysts’ EBITDA expectations this quarter. We were also happy its revenue narrowly outperformed Wall Street’s estimates. Overall, we think this was a solid quarter with some key areas of upside. The stock traded up 7.3% to $87 immediately after reporting.

Updated: July 7, 2025 at 11:02 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Transcat.

Transcat isn’t a terrible business, but it doesn’t pass our bar. Although its revenue growth was solid over the last five years and Wall Street believes it will continue to grow, its projected EPS for the next year is lacking. And while the company’s remarkable EPS growth over the last five years shows its profits are trickling down to shareholders, the downside is its diminishing returns show management's prior bets haven't worked out.

Transcat’s P/E ratio based on the next 12 months is 37.7x. This valuation tells us a lot of optimism is priced in - we think other companies feature superior fundamentals at the moment.

Wall Street analysts have a consensus one-year price target of $97.94 on the company (compared to the current share price of $86.35).