Wednesday, December 11, 2019

A Current AIM International Equity Holding: Descartes Systems Group (DSGX, $41.38): “Globalility”

Descartes Systems Group (DSGX, $41.38): “Globalility”
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.

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