Descartes Systems Group Inc

Descartes Systems Group Inc. (TSX: DSG), is a technology company focused on logistics and supply chain management business processes. Its solutions are cloud-based and are focused on the productivity, performance, and security of logistics-intensive businesses.

Why Should Investors Book Profit?

• Drop in US performance: Although the sales from the U.S region increased marginally in Q1 2022, to USD 55.2 million against USD 53.1 million in the previous corresponding period, but percentage of total revenues of U.S region fell to 56% from 63%, which is an area of concern.
• Stretched Valuation: DSG shares are available at an NTM Price/Cash Flow multiple of 42.5x compared to the industry (Technology) median of 20x. This implies that the shares are highly overvalued against the industry. The stock is overvalued on multiple valuation parameters. The table below reflects the picture.

• Technical Indicators are suggesting potential price consolidation or correction: Recently, the stock witnessed a healthy rally on the daily price chart and has moved above the upper band of the Bollinger Bands®, indicating the stock is perhaps overbought and due for a price correction or a consolidation. Furthermore, the momentum oscillator RSI (14-Period) is trading at ~81.23 levels, which also indicates that the stock is in overbought zone and there is a deep possibility of price consolidation or correction.

Source: REFINITIV, Analysis by Kalkine Group 

Valuation Methodology (Illustrative): EV to Sales

*1USD=1.26CAD

Stock recommendation

The company is continuously innovating to help its customers prepare for tomorrow’s challenges and is adding more solutions and trading partners to its network. As a result, the customers have trusted them with more of their business, again resulting in healthy set of numbers in Q1 2022. However, the decline in the revenue share from the U.S region raises the concern. Additionally, the stock is trading on highly stretched valuation against an industry, even the technical indicator suggests that stock is perhaps overbought and due for a price correction or a consolidation. Therefore, based on the above rationale and valuation, we recommend a “Sell” rating on the stock at the closing price of CAD 98.1 on August 30, 2021.

*The reference data in this report has been partly sourced from REFINITIV

Disclaimer

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