Descartes Systems Group is still undervalued, says M Partners analyst Shuttleworth

M Partners analyst Ron Shuttleworth says Waterloo’s Descartes Systems Group (Descartes Systems Group Stock Quote, Chart, News: TSX:DSG) will benefit directly from an improving US economy.

Shuttleworth says the recent acquisition of Norwegian SaaS provider KSD Systems is the company’s latest in a series of catalysts for revenue growth. He thinks Descartes’ will have an extremely strong fiscal 2014, with revenue besting 2013 by 24%.

Late in May, Descartes reported its Q1, 2014 financial results. The company earned (U.S.) $2.8-million on revenue of of $34-million, a topline that was up 14% from the $29.9-million the company posted in the same period a year earlier.

The M Partners’ analyst says despite strong double-digit topline growth, and an adjusted EBITDA margin he expects will come in at about 29% this year, Descartes continues to trail its peer group, valuation wise. Shuttleworth notes that traditional logistics software vendors trade at 22.5x forward EBITDA and its SaaS comparables at more than 35x EV/EBITDA. Descartes is currently trading at 18.9x EV/EBITDA.

This morning, in a research update to clients, Shuttleworth raised his 12-month target on Descartes to reflect a valuation that is more in line with what he thinks investors are willing to pay for earnings in a sector that is rapidly improving. By applying a 20.5x EV/EBITDA multiple to his expected fiscal 2014 earnings number of $46.3-million, Shuttleworth derived a new target price of $13.25 on Descartes, up from his previous target of $12.45. He maintained his BUY recommendation.

Shuttleworth says that as the U.S. economy continues to improve, we are now seeing another uptick in the supply chain, another development that puts the wind squarely at the company’s back.