Take a pass on Descartes Systems Group right now, says Haywood

A quarter that was in-line with consensus estimates has Haywood analyst Pardeep Sangha maintaining his view that Descartes Systems Group (TSX:DSG, Nasdaq:DSGX) is a pass right now.

Yesterday, Descartes reported its Q1, 2017 results. The company earned (U.S.) $6.88-million on revenue of $54.5-million, a topline that was up 11 per cent from the $48.9-million it posted in the same period last year.

“With evolving consumer buying patterns and a rapidly changing global trade landscape, our customers are increasingly looking to us to isolate them from complexity,” said CEO Ed Ryan. “We continue to add more solutions, content and capabilities to our global logistics network (GLN) so that our customers can not only navigate this changing landscape, but thrive with a competitive advantage where others see challenges. We believe our continued strong financial performance reflects our customers’ success in leveraging our investments to improve the security and efficiency of their operations.”

In a research update to clients today, Sangha maintained his “Hold” rating on Descartes Systems Group, but raised his one-year price target on the stock from $25.00 to $25.50, implying a return of 1.8 per cent at the time of publication. The analyst explains that while he raised his price target to bring the stock in-line with higher peer group multiples, he notes that having gained 15 per cent so far this year the stock’s valuation is looking decidedly rich.

“Descartes provided baseline guidance of $52.5M in visible and recurring contracted revenues for next quarter,” points out the analyst. “This is only $1.5M greater than the baseline calibration of $51.0M given last quarter, yet Q2 is generally a seasonally stronger quarter and the ShipRush acquisition should also help Q2 results. Nonetheless management maintained its guidance for annual Adj. EBITDA margin in the 32-37% range and to generate steady Adj. EBITDA growth of 10-15% in FY18.”

Sangha thinks Descartes will generate Adjusted EBITDA of $70.1-million on revenue of $203.8-million in fiscal 2017. He expects these numbers will improve to EBITDA of $78.9-million on a topline of $226.0-million the following year.