Haywood cuts rating on Descartes Systems Group to "Hold"

Haywood analyst Pardeep Sangha says Descartes Systems Group’s (Descartes Systems Group Stock Quote, Chart, News: TSX:DSG, NASDAQ:DSGX) most recent quarter was in-line with his expectations, but thinks the company is facing currency headwinds that could dampen its revenue growth in the near term.

On Wednesday, Descartes reported its Q3, 2017 results. The company earned (U.S.) $5.93-million on revenue of $51.5-million, a nine per cent betterment of the last year’s Q3 topline.

“This quarter’s record revenues and cash provided by our operations reflects Descartes’s focus on delivering strong financial performance,” said CEO Ed Ryan. “We believe that Descartes’s strong margins continue to demonstrate the leverage in our business model and the stability of the global logistics network to efficiently deliver quality services to all our global participants. We have a solid platform for continued growth and acquisitions, with a track record of execution, capital capacity and opportunities to continue or accelerate our pace of profitable growth.”

Sangha notes that the quarter was in-line with the consensus expectations, and with his. But the analyst says changes in the value of the U.S. dollar compared to the Canadian dollar, the Euro and other foreign currencies may materially affect the company’s operating results, going forward.

“Descartes reported record results in line with estimates and the outlook continues to look bright, but the company is facing currency headwinds which are dampening revenue growth in the near term,” he says. We continue to like Descartes but it is trading at high valuation multiples near our target price.”

In a research update to clients today, Sanngha maintained his (U.S.) $24.00 one-year price target on Descartes, but lowered his rating from “Buy” to “Hold”. Sangha’s price target implied a return of 8.4 per cent at the time of publication.

Sangha believes Descartes will post Adjusted EBITDA of $69.7-million on a topline of $202.9-million in fiscal 2017. He expects these numbers to improve to EBITDA of $80.6-million on a topline of $227.6-million the following year.