Strength across quarterly numbers is cause for a target raise for Descartes Systems Group (Descartes Systems Group Stock Quote, Chart, News, Analysts, Financials NASDAQ:DSGX), according to Laurentian Bank Securities analyst Nick Agostino, who delivered an update to clients on March 4. Agostino said the pace of M&A should pick up for Descartes while impressive profit margins look to be sustainable over the long term.
Descartes Systems is a software company for logistics-intensive industries with a SaaS platform to help businesses optimize and automate processes like planning, routing, scheduling, invoicing and tracking. The Waterloo, Ontario-based company announced its fourth quarter and fiscal 2021 results on March 3, showing Q4 revenues of $93.4 million, up 11 per cent year-over-year, and adjusted EBITDA of $38.6 million, up 20 per cent year-over-year. The company’s EBITDA margin went from 38.2 per cent in Q4 of fiscal 2020 to 41.3 per cent. (All figures in US dollars.)
For the full fiscal 2021 (ended January 21), Descartes’ revenue was up seven per cent compared to fiscal 2020 and adjusted EBITDA grew by 16 per cent to $142.0 million. Earnings per share for fiscal 2021 were up 36 per cent on a diluted basis to $0.61.
“This year our customers have faced numerous challenges, including supply and demand challenges, travel restrictions, weather events and unique work conditions,” said CEO Edward J. Ryan in a press release. “Our team of dedicated logistics professionals has done a great job to ensure that the Global Logistics Network was there to help our customers meet and overcome these challenges.”
DSG has been a strong performer over the past decade, consistently posting year-over-year growth in share price, including last year where the stock returned 34 per cent. So far in 2021, DSG is currently at even.
But Agostino sees more upside ahead and with the new report has moved his rating from “Hold” to “Buy,” with a raised target price of $67.00 (previously $61.00).
On the quarter, Agostino said Descartes managed a beat on its top and bottom lines, with the Q4 revenue of $93.4 comparing to Agostino’s forecast of $89.3 million and the consensus $89.5 million. Adjusted EBITDA of $38.6 million was also better than Agostino’s $37.6-million estimate and the consensus $36.9 million.
“DSG posted strong organic growth of 6.2 per cent, well above our two-per-cent estimate and just above the higher end of the company’s historical 4-6 per cent range, driven by: 1) ongoing demand for trade content and compliance; 2) opportunities in services and e-commerce; 3) trucking and related pick-up in MacroPoint; 4) step-function growth from Brexit-related tailwinds relating to filings and customs, and; 5) certain customers involved in vaccine distribution,” Agostino wrote.
“The company expects this elevated organic growth to persist in the short-term, aligning with our plus-seven per cent expectation and also supported by continued cross-selling opportunities going forward and signs of air cargo recovery,” he said.
Breaking down the quarterly sales numbers, Descartes had $82.7 million in its Services segment (up 4.3 per cent year-over-year), $1.4 million in Licenses (down 15.5 per cent) and $9.3 million in Professional Services and Other (up 12 per cent). Agostino had called for $79.3 million, $1.6 million and $8.3 million, respectively.
Agostino said his model had accounted accelerated organic growth with the reopening of economies, but that growth has come one quarter earlier than expected for DSG. The analyst said it’s likely a short-term elevation, however, while margin growth looks more long-term.
“We believe the delivery of EBITDA margin at the 40 per cent mark is proving to be increasingly sustainable, despite DSG’s conservative approach. We welcome the increasing openness for the company to be more active on the M&A front, as it remains a key component of the company’s strategy. Improving macro-environment data points are also encouraging,” Agostino said.
On the macro points in the logistics space, Agostino noted a recovery of air cargo volumes which according to the International Air Transport Association (IATA) were up 6.1 per cent year-over-year in January, essentially returning to pre-COVID levels. Agostino said both air cargo and ocean freight are experiencing capacity logjams, however.
Looking ahead, Agostino is now calling for fiscal 2022 revenue and EBITDA of $393.8 million and $162.7 million, respectively, and for fiscal 2023 revenue and EBITDA of $443.7 million and $184.3 million, respectively. At press time, the analyst’s new $67.00 target represented a projected 12-month return of 15.1 per cent.
Agostino said despite asset prices remaining high, he thinks DSG will likely pick up the pace of its acquisitions.
“We increase our F2022 sales estimate slightly to capture both the higher FQ4 revenues and the higher FQ1 year-over-year growth guidance of nine per cent inferred from the $86.8-million sales baseline guidance, which is taking as of February 26 to include the recent QuestaWeb acquisition. We maintain the steady growth in the ten to 15 per cent range as we introduce F2023 estimates, supported by elevated organic growth and further M&A,” Agostino wrote.
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