Descartes Systems Group still not a buy, Haywood says

Higher multiples for its peer group make him a little more bullish on Descartes Systems Group (Descartes System Group Stock Quote, Chart, News: TSX:DSG, Nasdaq:DSGX), but not enough for Haywood analyst Pardeep Sangha to recommend the stock.

In a research update to clients today, Sangha maintained his “Hold” rating on Descartes, but raised his one-year price target on the stock from (U.S.) $29.00 to $32.00, implying a return of 3.1 per cent at the time of publication.

On Wednesday, Descartes will report its Q3, 2018 results. Sangha expects the company will generate EBITDA of $21.0-million on revenue of $60.7-million, slightly better than the consensus of $20.4-million in EBITDA on a topline of $60.0-million.

Sangha explained the reasons for his price target raise.

“Descartes’ peer group valuation multiples have increased since our last report,” the analyst notes. “The Supply Chain industry peers currently trade at 27.3x EV/EBITDA, while the Canadian Software peers trade at 19.6x EV/EBITDA of consensus CY18 estimates (current average of the two groups is 23.5x EV/EBITDA vs. previous average of 18.0x EV/EBITDA). Descartes is currently trading at 24.5x EV/EBITDA of our CY18 estimates. Our new target price is based on a 25.0x EV/EBITDA multiple of our FY19 estimates compared to our previous target price based on a 22.7x EV/EBITDA multiple. We believe Descartes’ high valuation is justified by its industry leading EBITDA margins and strong revenue visibility.”

Sangha thinks Descartes will generate Adjusted EBITDA of (U.S.) 81.4-million on revenue of $234.4-million in fiscal 2018. He expects those numbers will improve to EBITDA of $96.7-million on a topline of $268.1-million the following year.