BEST SMIDCAP IDEAS: CONSISTENT COMPOUNDER
THE TD COWEN INSIGHT
Investors looking for consistent, stable, compounding cash flows should look to Descartes, especially given the recent share price pull-back. We believe organic growth and margins could move higher with the recent data acquisitions and that this accelerated pace of M&A can continue, which would drive further upside to the share price.
Summary Of Our Thesis
Despite a challenging macro environment, Descartes continues to operate exceptionally well. Organic growth of 8%-10% and EBITDA margin in the mid-40% range drives solid rule- of-50+ performance. We believe the company's strong balance sheet, with ~$240mm of cash, nil debt, and access to a $350mm revolver provide plenty of M&A upside to execute management's disciplined acquisition playbook. Over the last 15 years, EBITDA has grown at an ~20% CAGR, with EBITDA growth of at least 15% in each year, coupled with consistent cash conversion of 80%-90%+ driving compounding FCF.
What Is Underappreciated Or Misunderstood?
We believe the recent data solutions acquisitions of OCR and ASD provide organic growth and margin upside. These assets were growing consistently in the high single- to low double-digits, with upside potential if the company successfully cross-sells the solutions to its existing customer base. Given the operating leverage generated from prior data acquisitions, we believe there can be further upside to margins. Our sensitivity analysis supports a $124 valuation should organic growth accelerate and EBITDA margin expand further, $9 upside to our current $115 target.
Catalysts & Milestones To Watch
We believe Descartes is well positioned to continue its pace of acquisitions, despite already deploying ~$140mm in Q1/F25, supported by a strong balance sheet, active M&A pipeline, and reasonable valuations. Industry stakeholders have also reported accelerating ocean freight demand, in line with management commentary. This optimism could translate into improving organic growth throughout the year.
Price Target & How We Value The Stock
Our $115 target price is based on 29.2x-29.7x our C2025 EBITDA estimate. This valuation range is in line with its historical average, which we believe is justified given Descartes' consistent performance.
What Is The Bear Case & The Risks To Our Call?
Descartes trades at 26.6x forward EBITDA, which may seem high; however, valuation is slightly below its 5-year historical average and below its closest peers. If organic growth falls below the high single-digit range or M&A activity slows, multiples could remain compressed.