Descartes Systems Group is still a buy, Haywood says

Descartes Systems Group (Descartes Systems Group Stock Quote, Chart, News TSX:DSG, NASDAQ:DSGX) just finished up a strong first half of 2019 and investors should expect more of the same for H2, according to Haywood Capital Markets analyst Daniel Rosenberg

On Thursday, the analyst reviewed the logistics company’s latest quarterly results in a client update on Thursday. Rosenberg maintained his “Buy” rating and $44.00 target price, which at the time of publication represented a projected 12-month return of 21 per cent.

Waterloo’s Descartes Systems announced its fiscal 2020 second quarter results on Wednesday, featuring revenues up 20 per cent year-over-year to $80.5 million and up three per cent sequentially. Adjusted EBITDA of $30.2 million was a 32-per-cent year-over-year increase and a five-per-cent sequential increase. Shares of DSGX spiked on Thursday, climbing ten per cent and bringing the stock close to its record high set in late May of this year. (All figures in US dollars.)

Descartes management said that based on the strong first half performance, the year is likely to end up near the top end of its previously announced EBITDA guidance.

“Our customers are facing a more dynamic business environment than ever, with global trade regulations changing on a daily basis and economic conditions in constant flux,” said CEO Ed Ryan in the quarterly press release. “This creates opportunities for companies that can react quickly with timely, reliable information and challenges for those that cannot. Our continued investments in our Global Logistics Network are helping our customers successfully navigate this environment, and in turn our customers continue to do more business with us, which is reflected in our strong financial results.”

Rosenberg said the Q2 came in close to his estimates, with the $80.5 million in revenue arriving ahead of the consensus $80.3 million but a hair below his $80.8 million estimate, while the $30.2 million in adjusted EBITDA was slightly ahead of both the Street’s $29.6 million and Rosenberg’s $29.4 million.

Rosenberg says he’s impressed by Descartes’ organic growth and clear talent in acquiring and integrating businesses, a skill that has been on display through its acquisition of 45 companies in the logistics and supply chain management space since 2006.

“The Company has consistently demonstrated an ability to acquire, integrate, and extract synergies through M&A,” writes Rosenberg. “We believe investors will continue to be rewarded in the long-term as Descartes consolidates the sector.”

Rosenberg says he expects DSGX’s Q3 to be strong, while for the year he is calling for $327.1 million in revenue in Descartes’ fiscal 2020, compared to $275.2 million in fiscal 2019, and EBITDA of $121.1 million, compared to $93.9 million in fiscal 2019.

The analyst says his valuation and target put DSGX at the higher-priced end of its peer group but he thinks that Descartes merits the premium.

“Our target price is based on a 28x EV/EBITDA multiple of our FY21 estimates and a 10x EV/Revenue multiple. Descartes has traditionally traded at a premium to its peer group because of its highly predictable recurring revenue and strong EBITDA margins. Descartes is currently trading at 23.2x EV/EBITDA of consensus CY20 estimates, ahead of its peer group average of 19.1x,” Rosenberg writes.