Descartes Systems Group Inc: Strong Long-Term Prospects Despite Trade Fears

Descartes Systems Group Inc Trade Fears Aren't Hurting Prospects
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A Survivor From the 2000 Tech Implosion Is a Model of Consistency

I’m not sure how many of you remember the technology implosion way back in 2000, but it was nasty and swift, devastating the technology sector for years to come.

There are many survivors from that era that have proven to be good companies.

Descartes Systems Group Inc (NASDAQ:DSGX) was a high flyer in those euphoric days when everything went up regardless of fundamentals.

DSGX stock traded at over $91.00 in March 2000, prior to the bottom falling out. For the next decade, Descartes stock traded in a narrow sideways channel bounded by tough resistance at around $6.00-$7.00.

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Chart courtesy of StockCharts.com

The stock has been rallying, up 42% this year and 15.42% over the past year.

Descartes is a developer of on-demand software-as-a-service solutions to improve the productivity, performance, and security of logistics-intensive companies. Solutions are used in delivery, shipping, and transportation.

The company is a play on domestic and international trade, so the current trade and tariff battles may be limiting the upside.

But trade will continue to grow, and this will benefit companies like Descartes Systems Group Inc.

DSGX Stock Steady Growth Supports Bull Story

Descartes reports in a fiscal year ending January 30. The financials are reported in the Canadian dollar while the estimates are expressed in the U.S. dollar.

Revenues have nearly doubled over the past five years, from $190.33 million in fiscal 2015 to $358.71 million in fiscal 2019.

Descartes managed to report sequential revenue growth in every year.

Fiscal Year Revenue (Millions) Growth
2015 $190.33 21.1%
2016 $239.80 26%
2017 $268.35 11.9%
2018 $306.67 14.3%
2019 $358.71 17%

(Source: “Descartes Systems Group Inc.” MarketWatch, last accessed July 5, 2019.)

Looking ahead, Descartes is estimated to grow revenues by 18.70 to US$326.60 million (about CAD$428 million) in fiscal 2020 and 10.70% to US$361.45 million (CAD$474 million) in fiscal 2021. (Source: Descartes Systems Group Inc (DSGX),” Yahoo! Finance, last accessed July 5, 2019.)

Descartes Systems Group Inc is delivering positive earnings before interest, taxes, depreciation, and amortization (EBITDA) and is profitable with five consecutive years of growth.

Fiscal Year EBITDA (Millions) Growth
2015 $56.21 27.1%
2016 $76.72 36%
2017 $88.60 15.5%
2018 $98.62 11.3%
2019 $115.71 17.3%

(Source: MarketWatch, op. cit.)

The following chart shows the generally accepted accounting principles (GAPP) diluted earnings per share (EPS):

Fiscal Year GAAP Diluted EPS Growth
2015 $0.23 50%
2016 $0.35 49.6%
2017 $0.41 16.6%
2018 $0.45 10.8%
2019 $0.52 15.9%

(Source: Ibid.)

There is some expected stalling, as Descartes is estimated to report a drop in adjusted earnings to US$0.37 (CA$0.48) per diluted share in fiscal 2020 but come back with US$0.57 (CA$0.75) and as high as US$0.76 (CA$0.99) per diluted share in fiscal 2021. (Source: Yahoo! Finance, op. cit.)

Another big plus is that Descartes is a consistent producer of positive free cash flow (FCF), with growth in each year from fiscal 2015 to fiscal 2019, except fiscal 2018.

Fiscal Year FCF (Millions) Growth
2015 $52.13 24.7%
2016 $64.73 24.2%
2017 $89.11 37.7%
2018 $86.61 -2.8%
2019 $94.94 9.6%

(Source: MarketWatch, op. cit.)

Analyst Take

Descartes Systems Group Inc is a stock of the future given the expected continued expansion in global trade. The company has operations around the world to reap the benefits of domestic and global trade.

Trading at roughly 50 times its high estimate for 2021, DSGX stock is not cheap, so it probably makes some sense to accumulate positions on dips.