By Gordon Pape
Sub-indexes usually offer an accurate assessment of what’s happening in a specific sector of the economy. But not always.
Take a look at the S&P/TSX Information Technology sub-index. Based on the year-to-date gain of only 4.1%, you’d think there was nothing happening there that is worth your attention.
You’d be wrong. The index is being dragged down by its largest single component, Shopify, which is off 14.21% so far this year. Most of the other companies in the index are doing very well, thank you.
The leader in terms of price gain continues to be Celestica (TSX, NYSE: CLS). We recommended it in November 2023 at $38.46 and advised taking half profits in June at $76.19 for a gain of 98% in seven months. The shares are currently trading at $81.01, up 109% year-to-date.
Here are two other CanTech recommendations that are also posting good gains this year.
The Descartes Systems Group (TSX: DSG, NDQ: DSGX)
Originally recommended on Oct. 30/17 (#21739) at C$37.83, US$29.45. Closed Friday at C$137.76, US$101.07.
Background: Descartes provides on-demand, software-as-a-service solutions focused on improving the productivity, performance, and security of logistics-intensive businesses. Customers use its services to route, schedule, track, and measure delivery resources; plan, allocate, and execute shipments; rate, audit, and pay transportation invoices; access global trade data; file customs and security documents for imports and exports; and complete numerous other logistics processes. The company’s headquarters are in Waterloo, Ontario and Descartes has offices and partners around the world.
Performance: We recommended taking half profits in March 2023 when the shares were trading at $103.27, giving us a gain of 173% to that point. This means we have a guaranteed profit no matter what the stock does from here. Fortunately, it’s still rising, with a year-to-date gain of 24%. The shares are currently trading at $137.76, near the all-time high of $138.57. The stock is up 264% since the original recommendation.
Recent developments: The company recently released first quarter results for fiscal 2025, for the three months to April 30.
Revenues were $151.3 million, up 11% from $136.6 million in the first quarter last year and up 2% from $148.2 million in the previous quarter. Note that the company reports in US dollars.
Services revenues were $137.8 million (91% of the total), up 11%. Professional services and other revenues were $13 million (9% of total revenues) and license revenues were $0.5 million.
Net income was $34.7 million ($0.40 per diluted share), up 18% from $29.4 million ($0.34 per share) last year. Net income as a percentage of revenues was 23%, compared to 22% a year ago.
Adjusted EBITDA was $67 million, up 16% from $57.7 million in last year’s first quarter. Adjusted EBITDA as a percentage of revenues was 44%, compared to 42% a year ago.
“Global trade is complex and constantly evolving. Supply chains and logistics operations continue to be impacted by a myriad of factors, including military conflicts, disruptions to trade routes, government sanctions, and material changes to taxes and tariffs,” said CEO Edward J. Ryan. “Our technology solutions are designed to help shippers, carriers, and logistics services providers manage this dynamic complexity. We remain focused on delivering valued services to all supply chain participants and making meaningful investments that will help our customers manage their immediate and future supply chain and logistics challenges.”
Acquisitions: Descartes grows its business both organically and through acquisitions. It added two new companies in the quarter.
On March 28, Descartes acquired OCR Services, Inc., a leading provider of global trade compliance solutions and content. The purchase price was approximately $82.8 million, which was funded from cash on hand.
On April 22, Descartes acquired Aerospace Software Development, a leading provider of customs and regulatory compliance solutions. The price was approximately $62.5 million, net of cash acquired, which was substantially paid at closing from cash on hand with the remaining $5.1 million expected to be paid by the end of Descartes’ fiscal 2025 fourth quarter.
In June, Descartes bought BoxTop Technologies Limited, a leading provider of shipment management solutions for small- to mid-sized logistics services providers (LSPs).
Based in Windsor, England, BoxTop helps LSPs digitize their operations and connect to the wider logistics community to manage the lifecycle of shipments. LSPs use the BoxTop platform to manage the secure and efficient movement of goods from quoting through to routing, booking, and final delivery.
“We’ve been working successfully with BoxTop for a number of years, and this was the next logical step in our partnership,” said Scott Sangster, General Manager Logistics Services Providers at Descartes. “This will help us deliver more value to BoxTop customers and expand the geographic footprint into more countries in Europe.”
Descartes acquired BoxTop for approximately £10.25 million (US$13 million), using cash on hand.
Dividend: Descartes does not pay a dividend.
Outlook: Good. The company continues to increase revenue and profits at a double-digit rate.
Action now: Buy.
Constellation Software (TSX: CSU)
Reinstated on Feb. 12/24 (#22406) at $3,732.08. Closed Friday at $4,147.15.
Background: Constellation is a large tech company by Canadian standards with a market cap of about $88 billion. It was founded in 1995 to assemble a portfolio of vertical market software companies that had the potential to be leaders in their particular area of expertise. The company has grown rapidly through a combination of acquisitions and organic growth and continues to apply the same formula.
Performance: The shares continue to hit new all-time highs. The stock is up about 25% year-to-date and shows a gain of 11% since it was reinstated as a Buy in February.
Recent developments: The company’s first quarter results showed continued strong growth. Revenue increased 23% to $2.35 billion compared to $1.92 billion in the first quarter of 2023. The increase is primarily attributable to growth from acquisitions as the company experienced organic growth of 4% in the quarter.
Net income attributable to common shareholders was $105 million ($4.95 per diluted share), compared to $94 million ($4.44 per share) in the prior year.
Free cash flow available to shareholders decreased $7 million to $446 million compared to $453 million for the same period in 2023.
Constellation continued its acquisition policy, spending $223 million (including acquired cash) on new purchases during the quarter. Deferred payments associated with these acquisitions have an estimated value of $65 million, resulting in total consideration of $288 million.
Dividend: The stock pays a quarterly dividend of $1 per share ($4 annually) to yield 0.14%.
Outlook: The formula continues to work. There is no reason to believe it won’t continue to do so. But the shares are expensive at this level with a p/e ratio of 111.3.
Action now: Hold.