It is a quiet day in terms of news announcements. There are no major economic reports released today nor are there any companies in the S&P/TSX composite index scheduled to report quarterly earnings results.
Briefly recapping Friday's stock market returns, major North American equity markets closed in positive territory.
In the U.S., the Dow Jones Industrial Average rallied 0.21 per cent, the S&P 500 index advanced 0.33 per cent, and the Nasdaq composite index increased 0.39 per cent.
Turning to Canada, the S&P/TSX composite index increased 23 points, or 0.06 per cent, with 10 of the 11 sectors in the Index closing higher. There were 191 securities in the TSX Index that advanced, 57 securities declined in value, and one stock closed the day unchanged.
The TSX Index is up 1.43 per cent year-to-date.
On today's TSX Breakouts report, there are 30 stocks on the positive breakouts list (stocks with positive price momentum), and 29 stocks are on the negative breakouts list (stocks with negative price momentum).
The security highlighted today appears on the positive breakouts list. The stock is from the top performing sector in the TSX Index year-to-date – the technology sector. The company is Descartes Systems Group Inc. (DSG-T).
A brief outline is provided below that may serve as a springboard for further fundamental research.
The company
Waterloo, Ont.-based Descartes provides logistics and supply chain management solutions through its cloud-based software technology. Descartes has a diversified, global customer base servicing transportation providers such as air carriers, ocean carriers, truck carriers, and rail carriers. The company has an attractive recurring revenue business model.
In terms of geographical revenue breakdown, in fiscal 2017, 52 per cent of the company's total revenue was from the U.S., 37 per cent was from Europe, the Middle-East, and Africa, 7 per cent was from Canada, and 4 per cent was from Asia.
After the market closed on March 8, the company reported fourth-quarter fiscal 2017 financial results that were relatively in-line with expectations. The company's fiscal year end is Jan. 31. The company's earnings are reported in U.S. dollars. Revenue came in at $52.8-million, up 10 per cent year-over-year, and in-line with the Street's forecast of $52.5-million. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) was $18.5-million, slightly ahead of the consensus estimate of $18.2-million.
Acquisitions remains a key component of management's corporate growth objectives. On the conference call, Ed Ryan, the chief executive officer, stated, "We have a very healthy balance sheet. We're profitable and cash-generating. We have low capital needs within our organic business. Our primary uses of capital are for continued use in acquisitions. As you may be aware, we've completed 35 acquisitions since 2006. And finally, we have access to additional capital should we need it. Allan mentioned our undrawn line of credit of $150 million. And we've also filed a shelf prospectus for up to $500 million, if capital was needed to be raised by other mechanisms. We have a strong acquisition pipeline."
Management targets annual adjusted EBITDA growth of between 10 per cent and 15 per cent. In fiscal 2017, adjusted EBITDA margins came in at 34 per cent. Management raised its EBITDA margin target to between 32 per cent and 37 per cent, up from its previous outlook of between 30 per cent and 35 per cent.
The stock price rose 1.7 per cent the following trading day, on high volume with nearly 600,000 shares traded, well above the three-month historical daily average trading volume of approximately 230,000 shares.
The stock trades on both the Toronto Stock Exchange, under the ticker DSG, as well as on the Nasdaq, under the ticker DSGX.
Dividend policy
The company is focused on growth and currently does not pay its shareholders a dividend.
Financial forecasts
The Street is forecasting revenue of $227-million (U.S.) in fiscal 2018, up from $203.8-million in fiscal 2017, with revenue forecast to rise 11 per cent to $253-million in fiscal 2019. The consensus EBITDA estimate is $81-million in fiscal 2018, rising 14 per cent to $92-million the following fiscal year. The consensus EPS estimates are $1.05 in fiscal 2018 and $1.19 in fiscal 2019.
Earnings revisions
Earnings revisions have been positive with analysts revising their earnings forecasts higher. For instance, three months ago, the EBITDA estimates were $79-million for fiscal 2018 and $90-million for fiscal 2019. The consensus EPS estimates were 85 cents for fiscal 2018 and $1.06 for fiscal 2019.
Valuation
According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA (EV/EBITDA) multiple of 18 times the fiscal 2019 consensus estimate, slightly above its three-year historical average multiple of 17 times. Over the past three years, the stock has traded at a forward EV/EBITDA multiple principally between 14 times and 20 times.
Most analysts set their target prices in U.S. dollars. On Friday, the stock price closed at $22.40 (U.S.). Target prices, expressed in U.S. dollars, range from a low of $22.50 (at BMO Capital Markets), suggesting the stock is fully valued, to a high of $27 (at RBC Capital Markets), implying upside potential of over 20 per cent. Individual price targets provided by 13 firms are as follows in numerical order: $22.50, $23, $24, $24.50, three at $25, $25.16, $25.50, two at $26, $26.64, and $27.
When converted to Canadian dollars, the consensus one-year target price is $33.72, suggesting a potential price return of 12 per cent over the next 12 months.
Analysts' recommendations
Since the beginning of 2017, 14 analysts have issued research reports on the company, 11 analysts have 'buy' recommendations and three analysts have 'hold' recommendations.
Chart watch
The long-term chart appears positive with the stock price in a firm uptrend.
On a shorter-term basis, the share price is up 5 per cent so far in 2017. However, since mid-2016, the share price has been locked in a trading range, primarily between $27 (Cdn) and $30, and is currently trading at the top end of this band.
If the share price can break above the $31 level, the stock price could rally to around $33.50.
Should the share price receded, there is initial support close to the $28 level, which is near its 200-day moving average (at $27.59) and also close to its 50-day moving average (at $28.70). Failing that, there is support around $26.
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The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company's dividend policy, analysts' recommendations, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.