KeyStone’s Stock Talk Show Episode 281.
Great to chat with you again this week just ahead of the Christmas Holiday season. Aaron will kick off the show answering a couple recent client questions regarding the division of assets between an existing TFSA and non-registered accounts – the idea of what type of stocks to hold in each account. I will kick off our YSOT segment on The Descartes Systems Group Inc. (DSG:TSX) provides software-as-a-service (SaaS) logistics and supply chain management solutions for distribution sensitive industries around the world. Descartes is a high-quality SaaS business, with a solid balance sheet and strong track-record of compounding capital via both organic and inorganic (M&A) growth – we will let you know if it combines growth and value at present. In our Star & Dog segment Brennan takes a look at a Star, Happy Belly Food Group (HBFG:CSE) which is up 417% YTD. Happy Belly’s mission is to be a leading consolidator and accelerator of emerging food brands – Brennan will let you know if the valuations match the mission. Last, but not least, Brett handles our Dog of the Week, SolarEdge Technologies symbol SEDG on the NASDAQ. SolarEdge specializes in creating direct current-optimized inverter systems for solar photovoltaic applications. The stock is trading down 87% year-to-date – Brett let’s you know what is making this Dog bark.
Let’s get to the show – I welcome my cohost, Mr. Aaron Dunn, and killer B’s, Brett and Brennan!
Our Poll Question this week?
Out of the following what will be the top performing asset class in 2025?
What does Descartes do?
Founded in 1981 and based in Waterloo, Ontario, Descartes provides software-as-a-service (SaaS) logistics and supply chain management solutions for distribution sensitive industries around the world. The company operates a transaction network called the Descartes Global Logistics Network, which provides electronic document exchange across various transportation modes and between enterprises. Descartes’ Global Logistics Network has over 200,000 connected parties in more than 160 countries and performs ~19 billion transactions per year. In addition to Descartes’ transaction network, the company provides value-added applications on top of its transaction network for five segments of the market: mobile & telematics, transportation management, customs & regulatory compliance, forwarder & broker enterprise solutions, and trade content.
YTD Stock Performance.
The stock is up around 50% on the year powered by a hot tech market and solid quarterly numbers – so let’s take a look at the quarter.
Q3 FY 2025 Highlights.
Revenues of $168.8 million, up 17% from $144.7 million in the third quarter of fiscal 2024.
Revenues were comprised of services revenues of $149.7 million (89% of total revenues), professional services and other revenues of $15.6 million (9% of total revenues) and license revenues of $3.5 million (2% of total revenues). Services revenues were up 15%
Cash provided by operating activities of $60.1 million, up 7% from $56.1 million in Q3 FY 2024 .
Net income of $36.6 million, up 38% from $26.6 million in Q3 FY 2024.
Earnings per share on a diluted basis of $0.42, up 35% from $0.31 in Q3 FY 2024..
Cash Position: At October 31, 2024, Descartes had $181.3 million in cash. Cash decreased by $71.4 million in Q3 FY 2025 and $139.7 million in YTD.
M&A Activity
Acquisition of MyCarrierPortal
On September 17, 2024, Descartes acquired Assure Assist, Inc. (MyCarrierPortal (MCP)), a provider of carrier onboarding and risk monitoring solutions for the trucking industry. The purchase price for the acquisition was approximately $22.5 million, net of cash acquired.
Acquisition of Sellercloud
On October 11, 2024, Descartes acquired Sellercloud LLC and certain assets of Sellercloud Europe Ltd. (Sellercloud), a provider of omnichannel ecommerce solutions. The purchase price for the acquisition was approximately $110.2 million, net of cash acquired.
M&A Activity
Descartes has deployed ~$1.6 billion capital on 50 acquisitions since 2009. Management continues to communicate that the company has a large M&A pipeline and the available financial resources suggest to that additional acquisitions are possible over the next 12–18 months.
Net cash fell to $174 million, from $245 million Q2. With a $350 million untapped credit facility and an estimated $275 million in FCG over the next 12-months, Descartes’ remains well capitalized to pursue acquisitions.
Valuations:
On a trailing basis, the company trades at ~75x EPS and at
~60x FY 2026 (next fiscal year) expected EPS. Descartes is expected to grow EPS 21.5% next year (FY 2026). The average historical PE ratio of over last ten years is 76.24. The current PE is slightly lower than 10-year historical average, but it is at its highest point over the past year, indicating a pullback might be natural at some point.
Descartes also trades at ~49x FY 2025 expected FCF which is near all-time highs.
Conclusion
Descartes is a high-quality SaaS business, with a solid balance sheet and strong track-record of compounding capital via both organic and inorganic (M&A) growth.
Long-term, we believe the company can continue to create share holder value through smart, accretive acquisitions, organic growth in the high single digits (above historical averages), and margin expansion with resulting FCF growth.
While a defensible long-term holding for investors looking 3-5 years forward, the stock is trading for higher relative valuations in a pricy market generally.
We like the business long-term, but see it as priced closer to perfection near-term and we are monitoring for a long-term entry point on a significant (15-20%+) pullback.
