ScanSource, Inc.: How This Bottom Performer Can Return Big Gains
SCSC Stock Is a Value Play Looking to Jump-Start Revenues
Taking a look at the stock market trash bin, I came across small-cap technology stock ScanSource, Inc. (NASDAQ:SCSC). ScanSource stock is currently in the dumps, down 28% from its 52-week high and is sitting just above its range low.
The company sells a broad range of technology products and services from over 500 suppliers to over 35,000 clients in the United States, Canada, Latin America, and Europe.
A look at the SCSC stock chart shows the stock facing multiple resistance at $44.00-$45.00 in the period from 2014 to 2018, prior to subsequent weakness to the current levels.
ScanSource stock has major technical support in place around $30.00. It needs to hold this level or face a further downside slide toward $25.00.
Chart courtesy of StockCharts.com
If SCSC stock can hold, it would give ScanSource time to re-energize its revenue side and drive up profitability.
What ScanSource, Inc. Needs to Do
ScanSource’s revenue side doesn’t jump out at you, but it has edged higher in four straight years, albeit at a slow rate.
The growth from fiscal 2014 to fiscal 2018 (ending in June) represents a compound annual growth rate (CAGR) of a modest 7.4%. ScanSource will need to ramp this higher.
| Fiscal Year | Revenue (Billions) | Growth |
| 2014 | $2.9 | |
| 2015 | $3.2 | 10.5% |
| 2016 | $3.5 | 10% |
| 2017 | $3.6 | 0.8% |
| 2018 | $3.9 | 7.8% |
(Source: “ScanSource Inc.,” MarketWatch, last accessed July 11, 2019.)
Revenue growth is estimated at a mere 1.8% to $3.9 billion in fiscal 2019, followed by three percent to $4.0 billion in fiscal 2020. (Source: ScanSource, Inc. (SCSC),” Yahoo! Finance, last accessed July 11, 2019.)
A plus is that ScanSource has been producing positive earnings before interest, taxes, depreciation, and amortization (EBITDA) profits and free cash flow (FCF).
ScanSource grew its EBITDA in three of the last four years, including to a five-year high in fiscal 2018.
| Fiscal Year | EBITDA (Millions) | Growth |
| 2014 | $116.0 | |
| 2015 | $119.4 | 2.9% |
| 2016 | $116.2 | -2.7% |
| 2017 | $119.7 | 3.0% |
| 2018 | $139.8 | 16.8% |
(Source: MarketWatch, op. cit.)
As far as profitability goes, ScanSource has been delivering earnings-per-share (EPS) profits on both a generally accepted accounting principles (GAAP) and adjusted basis.
| Fiscal Year | GAAP Diluted EPS | Growth |
| 2014 | $2.86 | |
| 2015 | $2.27 | -20.6% |
| 2016 | $2.38 | 4.9% |
| 2017 | $2.71 | 13.9% |
| 2018 | $1.29 | -42.4% |
(Source: Ibid.)
The company’s GAAP EPS fell to a five-year low in fiscal 2018.
ScanSource is expected to earn an adjusted $3.47 per diluted share in fiscal 2019, up from $3.11 per diluted share in fiscal 2018, and it’s expected to follow that up with $3.70 per diluted share in fiscal 2020. (Source: Yahoo! Finance, op. cit.)
The company has also been generating positive FCF, but it recorded a 77% decline in fiscal 2018.
| Fiscal Year | FCF (Millions) | Growth |
| 2014 | $36.5 | |
| 2015 | $54.8 | 50% |
| 2016 | $40.1 | -26.7% |
| 2017 | $86.0 | 114.4% |
| 2018 | $19.7 | -77.1% |
(Source: MarketWatch, op. cit.)
Analyst Take
The fundamentals and estimates show that ScanSource, Inc. has plenty of work to do to shore up its business and attract investors.
At first glance, ScanSource stock appears cheap, trading at 8.6 times its fiscal 2020 EPS and having a price-earnings-to-growth ratio of only 0.67, but there is a reason for the low valuation.
If ScanSource can address its anemic revenue growth, SCSC stock could attract investors and allow for a higher multiple.
