Take a pass on Descartes Systems, says Industrial Alliance

Cantor Fitzgerald analyst Tom Liston says that with 33 consecutive quarters EBITDA improvement, Descartes Q4 isn't exactly a surprise. Still, he says the numbers, which narrowly beat his own expectations, underline his investment thesis.

Ahead of Descartes Systems Group’s (TSX:DSG Quote, Chart, NASDAQ:DSGX) quarterly financial report, Industrial Alliance Securities analyst Blair Abernethy maintains his “Hold” rating for the logistics management company with an unchanged target price of $28.00.

SaaS company Descartes Systems will announce its fiscal 2019 second quarter ended July 31 financials on September 5, with consensus expectations for $67.5 million in revenue, representing an 18.1 per cent year over year increase, and EBITDA of $23.1 million, representing a 34 EBITDA margin, with an EPS of $0.26. (All figures in US dollars.)

Abernethy expects Descartes’ organic revenue growth to remain in the mid-single digit range over the near term, with both recent and future acquisitions to be a factor going forward.

“Trading at 29.1x P/E (F2019E), we are watching for potential catalysts, including accretive acquisitions, large retail customer wins, and improved organic revenue growth driven by cross selling (particularly in the trade content businesses),” says Abernethy in a client update on Wednesday.

“Since July 2015, Descartes has made 12 acquisitions for a total value of ~$377 million. The company has a cash balance of $36 million, available bank lines of $99 million, and a $750 million shelf prospectus, providing it with ample capacity, in our opinion, to continue to be a consolidator in its market over the next few years,” he says.

In terms of valuation, Abernethy says that DSGX is trading at 29.1x P/E on his fiscal 2019 estimate. “We note that comparable supply chain technology companies are trading at EV/Sales of 6-7x, while pure SaaS providers are trading at an EV/Sales range of 7-8x,” he says. “Descartes is trading at EV/Sales of 9.4x on F2019E, which is at the upper end of SaaS vendors.”

At the time of publication, Abernethy’s target represents a projected 12-month return of negative 15.4 per cent.