Descartes Systems Group has more upside, says Industrial Alliance’s Abernethy

Shares of Descartes Systems Group (TSX:DSG, Nasdaq:DSGX) are up more than 30 per cent in 2015, but Industrial Alliance Securities analyst Blair Abernethy thinks the stock has room to grow.

In a research report to clients today, Abernethy initiated coverage of Descartes with a “Buy” rating and one-year target price of $21.00, implying a return of 7 per cent at the time of publication.

While the lift in his current target may be modest, Abernethy says he sees additional room for returns that he hasn’t yet modeled into it from new acquisitions and from the possibility of Descartes experiencing improved traction with its partners.

Abernethy says there are several tailwinds supporting Descartes right now, including government regulations, logistics and machine-to-machine technology, and macro trends in international trade. The analyst says investors should watch the stock closely in order to take advantage of any pullbacks that may result from general market malaise.

“Despite its recent run up, we view the stock as reasonably attractive at current levels and note that there is likely upside to our estimates from M&A activity in 2016,” says the analyst. “The Company has a history of disciplined capital allocation and a very strong pipeline. We expect to see continued positive synergies from the M&A program and even more attractive deal pricing in a recessionary environment. On the organic side, we expect mid-single-digit organic growth in the next couple of years, with upside to this potentially driven by large retail customer projects. Finally, with 36% of its revenue sourced in Europe, the weak Euro in the last two years has weighed on top line growth, but this could reverse in coming years. At current levels, we view Descartes as a Buy and initiate with a $21 12-month target price, and we would likely be more aggressive buyers on a general market pullback.”

Abernethy says current retail trends are a distinct driver of growth for Descartes, noting that options such as online stores and mobile apps deploy direct-to-home delivery networks that enable traditional retailers to connect their ERP/SCM systems into delivery networks that can allow them to compete with the likes of Amazon.