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Buy Descartes Systems in logistics software, says Laurentian


Ahead of second quarter financials from Canadian logistics company Descartes Systems (Descartes Systems Group Stock Quote, Charts, News, Analysts, Financials NASDAQ:DSG), Laurentian Bank Securities analyst Nick Agostino maintained a “Buy” rating on the stock in a Thursday Equity Research report, saying favourable macro tailwinds should keep Descartes’ sails full going forward.

Waterloo, Ontario-headquartered Descartes, a SaaS platform for logistics-intensive industries, has a range of solutions for optimizing and automating processes including delivery planning, routing and scheduling, order tracking and invoicing as well as customs filing and documents for cross-border trade. Descartes has over 20,000 customers across 160 countries worldwide.

Due to deliver its Q2 fiscal 2023 numbers after market close on September 7, Descartes first quarter saw revenue climb 18 per cent year-over-year and up four per cent sequentially to $116.4 million and adjusted EBITDA up 23 per cent year-over-year and up two per cent sequentially to $51.2 million. Earnings per share were up 29 per cent to $0.27 per share. (All figures in US dollars.)

With a $5.8 billion market cap, Descartes Systems’ stock has been a strong performer for well over a decade, having risen from under $10 per share in 2012 to as high as $90 by November 2021. That’s when the market began its rotation and DSG fell to $57 in May before starting to recover. The stock has been hovering around the $70 mark for the past month.


But Agostino sees upside from here, pairing his “Buy” rating with a maintained $81.00 target price, which at the time of publication represented a projected one-year return of 15.1 per cent.

“Per the FQ1 call, tailwinds continue to support DSG’s sales performance including: 1) higher shipment volumes to support a ‘just in case’ mantra; 2) inflationary pressures (fuel costs, labour shortages) giving rise to clients seeking cheaper alternative logistics solutions; and, 3) witnessed solid demand for product screening due to geopolitical factors (Russia-Ukraine war, Brexit, and recent China lockdowns),” Agostino wrote.

For the fiscal second quarter, Agostino’s forecast is slightly above the consensus, calling for $119.1 million in revenue, which would represent a 13.9 per cent year-over-year improvement in comparison to the company’s historical range of between ten and 15 per cent. Adjusted EBITDA is expected to be $53.0 million, up 15.9 per cent year-over-year, and EPS is forecasted at $0.27 per share, flat year-over-year from last year’s $0.27 per share. The consensus call is for a $116.1 million topline, $52.2 million in EBITDA and EPS of $0.27 per share.

Descartes has made a number of acquisitions so far this year, including US customs filing solutions company NetCHB in February, machine learning-based mobile route executions solutions company Foxtrot in April and e-commerce shipping solutions company XPS Technologies in June. 

For the fiscal Q2, Agostino is estimating incremental M&A contributions of about $6.8 million from the new acquisitions, meaning that organic growth is expected to be around 7.5 per cent compared to the company’s historical average at between four and six per cent.

Agostino looked to world freight volumes as an indicator of DSG’s performance and said they rose about 0.4 per cent year-over-year for the month of July, following a decrease of 2.3 per cent in June. He noted that inventory-to-sales ratios remain below historical levels, thus driving freight demand over the last 18 months but offset by rising inflation and a normalized shift from goods to services as economies reopen. 

Agostino said his earnings picture for DSG’s fiscal Q2 is conservative relative to management’s guidance, calling for 15.9 per cent year-over-year EBITDA growth compared to guidance of about 18 per cent.

“Our EBITDA margin of 44.5 per cent is just above the upper end of DSG’s 38-43 per cent guidance reflecting growth in higher-margin subscription sales, partly offset by continued reinvestment in marketing, increasing sales costs on team expansion and rising labour rates, and ongoing customer success initiatives,” Agostino said.

Looking farther ahead, Agostino is calling for full fiscal 2023 sales of $479.4 million compared to $424.7 million generated in fiscal 2022 and for fiscal 2023 EBITDA of $213.3 million versus the year before’s $185.1 million. His forecast for fiscal 2024 is $543.9 million in revenue and $248.7 million in EBITDA.

On a comps basis, Agostino sees DSG to be currently trading at 26.7x next 12 months EBITDA versus its supply chain and logistics peers at 29.1x and its software consolidator peers at 11.2x.

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About The Author /

Jayson is a writer, researcher and educator with a PhD in political philosophy from the University of Ottawa. His interests range from bioethics and innovations in the health sciences to governance, social justice and the history of ideas.
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