Buy Descartes Systems on the pullback, Haywood Securities says

With the broader downturn across the tech sector, Descartes Systems Group (Descartes Systems Stock Quote, Chart: TSX:DSG, NASDAQ:DSGX) is now looking cheap, says Pardeep S. Sangha, analyst for Haywood Securities, who sees a projected 36 per cent upside over the next 12 months.

Ahead of Descartes’ third quarter fiscal 2019 financials due on November 28, Sangha is expecting 13 per cent year-over-year revenue growth to $70.3 million with Adj. EBITDA of $24.7 million versus $20.6 million last Q3. The analyst notes in a client update on Wednesday that he’s expecting Adj. EBITDA margins of 35.1 per cent, which would be an improvement over the 33.2 per cent margins last year.

“We like Descartes as a long-term investment opportunity because the company has high EBITDA margins, high recurring revenue, predictable cashflows, strong balance sheet, experienced management team and a track record of delivering consistently solid results. Management has followed a disciplined acquisition strategy that has resulted in a healthy share price appreciation over the past ten years,” says Sangha.

DSG is now down 23 per cent from its late August high, with Sangha saying the decline is a buying opportunity. For future catalysts, Sangha points to fourth quarter integration of recent acquisitions Velocity Mail and PinPoint, additional synergistic acquisitions over fiscal 2019, DSG reporting quarterly results above baseline calibration and EBITDA margin improvement over fiscal 2019 and 2020.

Sangha has a “Buy” rating with a US$37.25 target price for DSG