Descartes Systems is heading to $88, says Laurentian

Ahead of quarterly earnings this week from Descartes Systems Group (Descartes Systems Stock Quote, Charts, News, Analysts, Financials TSX:DSG), Laurentian Bank Securities analyst Nick Agostino says investors can expect continued macro tailwinds to support the company’s operations. In an update to clients on Thursday, Agostino reiterated his “Buy” rating and $88.00 target price, which at the time of publication represented a projected one-year return of 48.8 per cent.

Logistics-focused SaaS company Descartes has business solutions to optimize and automate processes like planning, routing, scheduling, delivery tracking, invoicing and payment. The company is expected to report its first quarter fiscal 2023 financials on June 1. 

Descartes last reported in March where its fourth quarter 2022 (ended January 31, 2022) featured revenue up 20 per cent year-over-year to $112.4 million and adjusted EBITDA up 30 per cent to $50.1 million. For the fiscal 2022 year, DSG’s revenue was up 22 per cent to $424.7 million, comprised of $378.5 million in Services revenues, $41.1 million in Professional Services and Other revenues and License revenues of $5.1 million. Adjusted EBITDA for the year was up 31 per cent to $185.7 million and cash from operations was up 34 per cent to $176.1 million. (All figures in this report are in US dollars.)

As for the fiscal Q1, Agostino said overall trade flow has slowed on the macro scale due to shipping bottlenecks, the surge in inflation and rising interest rates, with the result being his bullish call on Descartes. Agostino said his numbers are slightly above consensus, with the call being for $114.4 million in sales, including incremental M&A contributions from acquisitions NetCHB, GreenMile, Portrix and QuestaWeb and implying a roughly ten per cent organic growth rate. 

“As per the FQ4 conference call, tailwinds continue to support DSG’s solid performance, inclusive of: 1) Russia/Ukraine uncertainty that offers an opportunity through increased shipping complexity; 2) tight labor issues / inflationary pressures giving rise to increased freight costs and contracts; 3) higher volumes being shipped due to replenishment of inventory levels and a shift in inventory management from a ‘just in time’ to ‘just in case’; and 4) tailwinds related to Brexit and COVID,” Agostino wrote.

On earnings, Agostino is calling for EBITDA of $50.6 million, which would be in-line with the baseline guidance implying a 23 per cent year-over-year growth rate. The analyst said his forecasted EBITDA margin of 44.2 per cent is at the upper end of DSG’s 38-43 per cent guided range.

Descartes share price did very well in 2020 and 2021, providing an 89 per cent return over those 24 months. The stock has fared less well in 2022, dropping 27 per cent since the start of the year.

Agostino sees upside, however, saying his target comes from a blended valuation using a premium EV/EBITDA multiple and a 20-year DCF valuation net of acquisition costs (of a 30x EV/EBITDA equivalent. Agostino estimates DSG to be currently trading at 22.7x next 12 months EBITDA versus its supply chain and logistics peers at 35.6x, its software consolidator peers at 11.1x and comparable company Wisetech Global at 36.2x.