We regularly review Waterloo, Ontario-based non-Key stock Descartes Systems Group on The Back Page. Non-Key stock Descartes Systems Group is expected to continue to achieve higher earnings per share this year and next. It makes acquisitions to accelerate its growth in its markets. But it looks too costly for now. Hold.
Descartes Systems Group Inc. (TSX—DSG) “is the global leader in providing on-demand, software-as-a-service…focused on improving the productivity, performance and security of logistics-intensive businesses. Customers use our modular, software as-a-service…to route, schedule, track and measure delivery resources; plan, allocate and execute shipments; rate, audit and pay transportation invoices; access global trade data; file customs and security documents for imports and exports; and complete numerous other logistics processes by participating in the world’s largest, collaborative multimodal logistics community”. Descartes accelerates its growth through acquisitions.
Descartes makes a U.S. acquisition
On June 6, Descartes paid US$65 million cash on hand (potentially US$75 million) to acquire XPS Technologies. This Utah-based company is “a leading provider of ecommerce multi-carrier parcel shipping solutions. XPS provides its cloud-based multi-carrier parcel shipping…directly to small-, medium- and large-sized ecommerce shippers. It also provides a white-label shipping platform to logistics services providers. The XPS platform helps customers streamline their ecommerce supply chain and reduce transportation costs by automatically importing orders, comparing carrier rates, printing shipping labels for all major carriers, and tracking through final delivery”.
The XPS platform is even more powerful with its integrations to leading ecommerce marketplaces. It provides and supplies chain platforms. “We remain committed to serving the ecommerce market and we believe that scale matters. Combining with XPS adds ecommerce domain expertise, advanced parcel shipping technology and a community of more than 10,000 customers,” said Andrew Roszko, EVP Commercial Operations at Descartes. “Many of today’s small and medium ecommerce retailers will be the major enterprises of tomorrow, and our integrated ecommerce shipping and fulfillment solutions are designed to help these businesses through all phases of growth. XPS complements our significant recent investments in the ecommerce fulfillment and shipping space,” said Edward J. Ryan, Descartes’ CEO. “Together, we look forward to helping the community manage the full lifecycle of domestic and international e commerce shipments.”
Descartes earnings are growing quickly
In the year to January 31, 2023, Descartes earnings are expected to grow by 9.9 per cent, to $1.44 a share. Next year, its earnings growth is expected to accelerate by 23.6 per cent, to $2.10 a share. Based on this estimate, the stock trades at a high forward P/E ratio of 50.8 times. That seems excessive.
Descartes also trades at 35.1 times this year’s expected cash flow per share. That’s much more than the ratio of five times or less that can indicate a buy. The shares also trade close to twice their book value.
Descartes pays no dividends. It does, however, buy back its shares. It has approval to repurchase up to 7,389,623 common shares. That’s more than 8.7 per cent of the company’s 84,781,562 shares. These buybacks reduce the number of shares and raise the earnings per share. That should support the share price.
While we like Descartes, it looks over valued at this point. It remains a hold.
This is an edited version of an article that was originally published for subscribers in the September 16, 2022, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
The Investment Reporter, MPL Communications Inc.
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