Table Trac Stock Analysis
Business Description
Table Trac (TBTC) was founded in 1995 and is headquartered in Minnetonka Minnesota. The company is very small, with a market capitalization around $16.6M. Table Trac specializes in casino management systems. This consists of a software suite that handles game metrics, auditing, automation in customer tax documents, player rewards, among other things. Additionally the company produces hardware in the form of interactive kiosks that increase customer engagement, as well as touch screen modules for slot machines. The installed base of these management systems is composed of 100 different casino operators, with systems installed in 250 casinos. TBTC advertises their software as being simple, expandable and low cost. In one industry article, the CEO mentioned that their smallest customer is a gas station, and the largest casino with their system has 2,800 games.
Looking closer at how Table Trac makes money, they separate their their revenue into three categories: system revenue, maintenance revenue, service and other revenue. The system revenue is the upfront payment for installing the casino management system at a new casino. Upgrades of existing installations are also included in this revenue bucket. Next is maintenance revenue which is money coming from maintenance contracts with the customers. Then service and other revenue includes sales from their kiosks, leasing arrangements, and licensing deals.
Typically, about 60% of Table Trac’s revenue comes from system installs. Over the past few years, the company has installed between 10 and 29 systems. The system installs vary quite a bit, and since there are only a handful of them each year, they can dramatically impact revenues. One thing that is unclear is how TBTC combines full system installs and upgrades together in a single category, so it makes it difficult to know how much sales a single system install generates. Additionally, I’m sure the install price depends on how big the casino is. Table Trac has generally increased sales over the last 10 years, with some unevenness in the growth rate, and some down years. As I will get later in the valuation, I would hesitate to consider TBTC as a consistently growing company due to the choppiness of these system installs. On the bright side, the maintenance contracts and other revenue can help smooth out the revenue a bit.
Cause for Undervaluation
Since my goal is to find out of favor stocks, part of my checklist is to had an idea of why the stock has sold off and may be potentially undervalued. Looking at Table Trac’s stock price, the company was hovering a bit above $5 a share in the first couple months of 2023. Since then, the stock has trended downward, and now trades around $3.50. Looking at the quarterly reports during 2023 shows that TBTC has had fewer system installs and revenue is about 20% down. Looking at their financials, it appears that 2022 produced the best sales in the companies history. I could not find any other negative news pertaining to the company. So it appears Table Trac’s share price is down due to worse results compared to 2022.
Valuation
In my previous post in highlighting Table Trac as a potential undervalued stock, I was a bit over optimistic when it came to its valuation. My original quick valuation was based on the company’s TTM financials, so I used a $10M revenue figure as my starting point. After digging into the company, and noticing that Table Trac makes a large portion of their revenue from a handful of system installs each year that vary quite a bit, I decided to be more conservative. What I did was average the last six years worth of system install revenue (I did six years to be nice to them since 2020 was a poor year for installs). Based on this average, I get about $4M a year in sales, where the company did $6.2M in system sales in 2022.
In my updated valuation, I am going to use my average system install revenue figure, but use the recent maintenance and other revenue figures. This comes out to be $4M in system revenue, $3.5M in maintenance, $1.25M in other revenue, for an estimated revenue of $8.75M. Next, I looked at Table Trac’s historical operating margins. Their margins have varied quite a bit, but in 2022 the company had 18% margins.
Table Trac does spend a few hundred thousand a year on R&D, and they don’t break out their marketing figure, but I’m sure they spend a decent amount trying to win over new casinos. In Bruce Greenwald’s book, he values a company on a no growth, steady state scenario. This means if a company is spending money on R&D and marketing above the rate needed to maintain the business, then this excess can be added back to the operating profits. Using this justification, I will be a bit generous towards TBTC and use a 15% operating margin.
After applying the operating margin to my estimated revenue figure, the next step is to deduct taxes. For this I am assuming a 25% tax rate. This estimated after tax profit of $0.98M then capitalized using a discount rate, which I think 10% is reasonable. Finally I add back the $4.47M in cash on the balance sheet to get an estimated equity valuation of $14.3M. There are 4.61M shares outstanding, which gets us a fair value price of $3.10.
If someone valued Table Trac using their record financial results in 2022, I could see how the company might be worth around $5 a share. But I think it is unwise to use these figure because of the inconsistent earnings from the system installs. In the three reported quarters of 2023, the company has seen their revenue fall around 20%. If Table Trac can prove to have more consistent revenues, then I would certainly update my calculations. For now, I would rather be conservative with this company. Based on my valuation, the company is slightly over valued, but I will still add it to may watchlist in case it happens to sell off further.