Descartes Systems Group has no upside, Industrial Alliance says

In a research update to clients on Tuesday, Descartes Systems Group (Descartes Systems Group stock Quote, Chart TSX:DSG, NASDAQ:DSGX) gets a price target raise from Blair Abernethy of Industrial Alliance Securities. It’s still not enough to move the needle, however, as the analyst maintains his “Hold” rating on the stock.

Not only one of Canada’s most venerable tech companies, logistics management SaaS provider Descartes Systems is also known for its ability to acquire and absorb businesses. Descartes has made dozens of acquisitions since its IPO in 1998, this year featuring cloud-based transportation management company Aljex Software Inc and airline shipment tracker Velocity Mail.

Abernethy takes Descartes’ acquisition activity into account in his estimates which now include a contribution for future acquisitions. The analyst says the company is currently exhibiting organic growth of around five per cent, driven for the most part by its faster growth businesses such as MacroPoint, acquired in 2017, along with trade content services, cross selling and higher global trade volumes.

Inorganically, Abernethy sees acquisitions playing an increasingly important role in Descartes business model and in its revenue growth during recent years.

Descartes Systems Group stock is fully valued

“On our count, the company has completed 13 acquisitions in the past three years, including the larger $107 million MacroPoint and $76 million MK Data deals. Excluding these larger deals, Descartes acquired 11 companies at an average value of ~$18 million per transaction,” says Abernethy. (All figures in US dollars.)

“Given Descartes’ financial strength and the pace of smaller acquisitions, despite currently high prices in the marketplace, we now are more comfortable including unannounced future acquisitions in our forecast. At this stage, we will not model in larger transactions ($100 million+), but only smaller tuck-ins,” he says.

Abernethy’s 2018 and 2019 estimates remain unchanged at revenue, EBITDA and Adj. EPS fully diluted in 2018 of $237.2 million, $80.4 million and $1.03 per share and in 2019 of $277.5 million, 93.9 million and $1.18 per share. For 2020, the analyst expects Descartes to produce revenue, EBITDA and Adj. EPS f.d. of $311.5 million (was $297.6 million), $107.3 million (was $100.2 million) and $1.35 per share (was $1.26 per share).

For potential catalysts, the analyst is watching for large-scale accretive acquisitions, significant retail vertical wins and improved organic revenue from new products.

Abernethy’s new price target of $33.00 (was $29.00) represents a projected 12-month return on investment of negative 2.5 per cent at the time of publication.