By:
Edward Eisenhauer, AIM Student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary
• Descartes Systems Group Inc. (DSGX-US) is a global logistics and
telematics company headquartered in Waterloo, Canada and engages in a unique
provision of cloud-based solutions offering logistic and supply chain
management. These services include telematics, sourcing, transportation, audit,
customs, and compliance.
• DSGX’s EBITDA margin
continues to grow 20% YoY with 80-90% EBITDA cash conversion rate. These
metrics are expected to continue in the near-term.
• Strong eCommerce growth
and continued trade complexity have been secular tailwinds for DSGX. eCommerce
volume grew 16% YoY while the global consumer stayed strong.
• Continued M&A
appetite with a strong track record should continue to fuel margin expansion
and increase capital returns. Growing network effect should continue to be
accretive, boosted by the acquisitions.
Key
points:
DSGX is the largest pure play logistics provider in
the world and serves every segment of the transportation industry. The company
focuses on improving the productivity, performance, and security of
logistic-intensive businesses through a
globally connected cloud platform known as the Global Logistics Network (GLN). DSGX
sports an industry leading EBITDA cash conversion rate, averaging 80-90% over
the last decade, and FCF growth of 20%. With 89% recurring revenue and its
largest customer consisting of less than 3% revenue, DSGX business is resilient
and has outperformed in slow environments. From accretive bolt on acquisitions and
consistent organic revenue, DSGX has grown EBITDA by 19% annually over seven
years with 2.4% annual margin growth. DSGX’s EBITDA margin is 34% and is
expected to grow to 40% in the near-term. Future business opportunities are positive
with secular tailwinds in eCommerce, global supply chain, and customs.
What
has the stock done lately?
DSGX beat 2Q19 earnings
estimates in September by 23%, igniting a 10% rally in the stock price. During
the last few weeks, the stock has held that support level, fluctuating from $39
to $43, caused from the volatile trade negotiations between the US and China. 3Q19
revenue and earnings were mostly inline with business momentum expected to be
strong in the near-term with the holidays and the New Year.
Past
Year Performance:
Strong economic growth around the world
and increasing trade complexities have created strong demand for Descartes’
products. Their continued ability to grow their offerings and increase value
adding solutions has driven their stock price return to 55% YTD compared to 25%
of the S&P 500. In stride with the rest of the market, Descartes had poor
performance in August which was erased with an impressive Q2 earnings release.
Source:
FactSet
My
Takeaway
DSGX’s management
continues to perform well and stay to their philosophy. Recent performance
numbers have been strong with double digit revenue and EBITDA growth and
improved margins. The business environment is competitive but Descartes has
proven its ability to outperform its peers and the market in periods of strong
and weak demand. Secular growth trends are still intact and are expected to
drive enhanced profitability for the next 2-3 years.
Source:
FactSet
