At a market cap <$15mm, TableTrac (TBTC) is small enough to fall off the radar of most investors but definitely deserves a look for those of us that traffic in the under the radar world. I originally came across this name in Avram Fisher’s 3Q18 letter to investors (http://www.longcastadvisers.com/letters). As an aside, I would definitely recommending Fisher’s letters to anyone interested in small and microcap companies, it’s always one I look forward to every quarter.
TBTC’s business model is simple enough. Their main product, Casino Trac, helps casinos track and manage table games, loyalty programs, as well as cash management and accounting/audit. The company initially sells the hardware and then also collects service and maintenance revenue once the system is installed. The split between Hardware and Service revenue is roughly 65%/35%, respectively. Despite its size, TBTC has been able to carve out a nice little niche catering to smaller casino operators in 14 states (MD, TX, OK, CO, NE, IA, MN, WI, ND, SD, MT, WA, NV, CA), Central and South America, the Caribbean, Australia, and Japan.
Why do I like the stock?
- Growth Potential: TBTC has admirably executed on its growth plan thus far. Results tend to not increase in a straight line given the lumpiness of contract wins but the last three years have seen revenues grow at a 10% CAGR due to a significant pickup in installation momentum as the company has successfully expanded its footprint in the U.S. and with suppliers in Australia and Japan. 2011-2014 averaged about 8 installations per year with 2015-2018 registering an average of 14 per year. In the first half of 2019, the company installed 5 systems and has another 4 in backlog. I don’t expect this momentum to stop either. The company is only in 14 states and has proven they can enter foreign markets through distribution agreements most notably in Australia and Japan. Their exclusive Australian supplier installed another 11 systems in 1H2019 and in early July, TBTC announced an exclusive distribution agreement with a Japanese company, with $1.2mm of contract deliverables expected to be recognized in Q3 2019.
- Valuation: On the surface at an EV/EBIT of ~20x, the average passerby probably isn’t going to think TBTC is a steal of deal. However, I think this would be ignoring the company’s growth prospects and the fact that the current level of SG&A spend is artificially high as the company is focused on growing installations (operating Income has still grown at a 50% CAGR over the last 3 years despite high levels of growth spending). Over time I’d also expect gross margins to improve from the already impressive high-60% area as service and maintenance revenue continues to increase as a percentage of total revenue. The supplier agreements in Australia and Japan will also continue to deliver higher margin revenues and I would expect this to be replicated in more markets. (I’m planning on attending the Annual Meeting at the end of the month and this is something I’m going to ask more about.)
- Aligned Incentives: Founder/CEO Chad Hoehne owns ~26% of the company. Hoehne had stepped down as CEO in 2011, maintaining a board seat and President role, but retook the CEO role in 2017. I have no idea the circumstances surrounding these role changes, but I would imagine it wasn’t his plan to retake the day-to-day operations. As with any owner/operator, one of the most likely exits is through a sale and I think TBTC has definitely proven they own their niche of the market, and could prove valuable to a larger strategic competitor.
I don’t own shares because I think the company might be purchased at a premium any time soon. I own shares because I think you get a high quality business, with an impressive growth runway that is not reflected in today’s valuation. Please comment with any comments, criticism, corrections, etc.
Thank you for reading.
Mesaba Range Value 