The global supply chain mess has been one of the biggest business stories of 2021. The pandemic has caused disruptions to the supply chains of many industries, hurting companies and consumers.
Some companies are losing sales due to their inability to fully meet customer demand for select products. They’re also being negatively impacted on the bottom line because of higher delivery costs. Consumers are facing higher prices stemming from companies passing along their additional costs, longer wait times to obtain certain products, and the unavailability of some items.
The pandemic has exposed the need for much more robust supply chains. Granted, this particular crisis will eventually be better controlled, but there will be other epidemics and pandemics in the future, as well as other events — such as natural disasters stemming from climate change — that will disrupt supply chains around the world.
So, it seems a good bet that many companies will continue to place greater importance on their supply chains. One company that should continue to benefit from this dynamic is Descartes Systems Group (NASDAQ: DSGX), which touts that it’s the “global leader in providing on-demand, software-as-a-service solutions focused on improving the productivity, performance and security of logistics-intensive businesses.”
Image source: Getty Images.
Descartes’ business
Descartes gets its name from René Descartes, the 17th-century French inventor of analytic geometry, also known as coordinate geometry. The company is based in Ontario, Canada, and was founded in 1981. It held its initial public offering (IPO) on the Toronto Stock Exchange in 1998, and listed its stock on a U.S. exchange, the Nasdaq Stock Market, in 1999.
The company provides cloud-based logistics and supply chain software and services. Its Descartes Logistics Technology Platform, in the company’s words, “digitally combines the world’s most expansive logistics network with the industry’s broadest array of logistics management applications and most comprehensive offering of global trade related intelligence.”
The company offers solutions in the following categories: business-to-business connectivity and messaging, customs and regulatory compliance, broker and forwarder enterprise systems, global trade intelligence, e-commerce shipping and fulfillment, transportation management, and routing/mobile/telematics.
Descartes’ target market includes companies in the retail, manufacturing and distribution, transportation and logistics, field service and sales, and e-commerce industries. Its customers include big names such as Delta Air Lines, FedEx, Home Depot, Coca-Cola, and Toyota, according to its December 2021 Investor Presentation.
Financial results
For the first nine months of Descartes’ fiscal year 2022 (through Oct. 31, 2021), its revenue jumped 22% year over year to $312.3 million. Growth was driven by a 23% increase in services revenue to $279 million, or 89% of total revenue. Professional services and other revenue accounted for about 10% of total revenue, while license revenue contributed roughly 1% to total revenue.
Net income for this nine-month period soared 92% year over year to $67.1 million, which translated to earnings per share (EPS) rocketing 90% to $0.78.
One big thing to like about Descartes is that it churns out strong cash flows. For the first nine months of fiscal 2022, cash provided by operating activities surged 38% year over year to $130.6 million.
Stock and related financial stats
| Company | Market Cap |
P/E |
Price/Free Cash Flow |
Wall Street’s Projected 5-Year Annualized EPS Growth | YTD 2021 Return | 10-Year Return |
|---|---|---|---|---|---|---|
| Descartes | $6.5 billion | 78 |
41 |
26% (following projected growth of 61% this year) |
30.9% | 981% |
| S&P 500 | — | — | — | — | 23.3% | 349% |
Data sources: Yahoo! Finance and YCharts. YTD = year to date. Data to Dec. 20, 2021.
With a price-to-earnings (P/E) ratio of 78, Descartes stock is very pricy if one believes that its earnings will “only” grow at a 26% average annual rate over the next five years. But the company has a solid recent track record of beating analysts’ earnings estimates, so there’s good reason to believe that its earnings growth will exceed that 26% projection.
Moreover, the stock is considerably more attractively priced using price-to-free-cash-flow (FCF) as the valuation metric. This is arguably a better valuation metric, at least over the long term, than the commonly used P/E ratio because “earnings” (or net income) is simply an accounting metric.
That said, the stock is still highly valued, but this shouldn’t matter that much for investors who have a long-term investing horizon. Besides, high-quality stocks rarely come cheap.
The company’s balance sheet is in good shape. At the end of its most recently reported quarter, it had $171.1 million in cash and no debt.
One thing, however, gives me pause about Descartes stock as a potential investment: its paltry insider ownership. Insiders own only 0.1% of the company’s outstanding shares, according to the most recently available data. This fact suggest that investors might want to watch this company closely for a couple of quarters before taking the plunge and buying its stock.
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Beth McKenna has no position in any of the stocks mentioned. The Motley Fool owns and recommends FedEx and Home Depot. The Motley Fool recommends Delta Air Lines. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
