Descartes Systems a trade-war winner

10-07-2019
Descartes Systems a trade-war winner

Leader in transportation data management

 

Donald Trump’s trade wars are roiling world markets and hurting the economies of both China and the U.S. The tit-for-tat escalation of tariffs on both sides has disrupted long-standing supply chains and left businesses with international operations scrambling to find alternatives. But there are some companies that are actually prospering from all this chaos.

One of them is Descartes Systems Group (TSX: DSG), which I first recommended in my Internet Wealth Builder newsletter in October 2017 at C$37.83.

Descartes offers a wide range of business software solutions, including shipment management, transportation tracking, inventory management, freight auditing, and more. Among its core services is a database of customs regulations, tariff rates, and global trade content.

Imagine how important that information is to importers, exporters, and brokers as they struggle to keep abreast of the latest tariff hikes and import restrictions.

The financial impact of this showed up in the company’s 2020 second-quarter results (to July 31). The company reported a 20% year-over-year increase in revenue, to $80.5 million this year from $67.1 million in 2018. (Note that Descartes reports in U.S. dollars.) The service sector of the business provided the biggest boost, with revenue increasing to $71.4 million this year from $59.7 million in 2018.

“Our customers are facing a more dynamic business environment than ever, with global trade regulations changing on a daily basis and economic conditions in constant flux,” said CEO Edward J. Ryan.

“This creates opportunities for companies that can react quickly with timely, reliable information and challenges for those that cannot. Our continued investments in our Global Logistics Network are helping our customers successfully navigate this environment, and in turn our customers continue to do more business with us, which is reflected in our strong financial results.”

Adjusted EBITDA was up 32%, to $30.2 million from $22.8 million a year ago. However, net income advanced only slightly, to $8.6 million from $8.5 million the year before and was actually down on a per share basis, to $0.10 from $0.11.

The reason for the decline in earnings per share was a June public offering of 6.9 million common shares that raised approximately $236.6 million. The increased share count reduced the earnings per share.

For the first half of the fiscal year, Descartes reported revenues of $158.5 million, up 18% from $134.1 million in the same period a year ago. Adjusted EBITDA was $58.9 million, up 31% from $44.9 million last year. Adjusted EBITDA as a percentage of revenues was 37%, compared with 33% the year before.

Net income was $15.9 million ($0.20 per share), up 3% from $15.5 million (also $20 per share) in the first half of fiscal 2019.

The company continues to grow by acquisition. On May 10, Descartes acquired Core Transport Technologies NZ Limited, an electronic transportation network that provides global air carriers and ground handlers with shipment scanning and tracking solutions. The purchase price was approximately $21.8 million.

In June, Descartes acquired Tegmento AG and Contentis AG, a business-to-business supply chain integration network based in Switzerland. The purchase price was $18.6 million. And in August, the company acquired all the shares of BestTransport.com, a cloud-based transportation management system provider focused on flatbed-intensive manufacturers and distributors. The purchase price was $11.7 million.

I think this stock still has upside potential, and I am retaining it as a Buy on my Internet Wealth Builder recommended list. Ask your financial advisor if it is suitable for you.

Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website.

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The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.