Segment Realignment And Expense Streamlining Will Drive Operational Efficiency

Key Takeaways

• Strategic acquisitions and a hybrid distribution strategy are projected to enhance recurring revenue and improve profit margins and earnings.
  
• Streamlining SG&A expenses and segment realignment are expected to boost working capital efficiency and net margins.
  
• Declining sales and soft demand pose revenue challenges, with FX risks in Brazil and competition threatening profitability and earnings growth.

Catalysts

Engages in the distribution of technology products and solutions in the United States, Canada, and Brazil.

• The acquisition of Resourcive and Advantix is expected to boost ScanSource's recurring revenue streams and improve profit margins, given that these businesses are high-margin and working capital-light. This should positively impact earnings and profitability.
  
• The company's hybrid distribution strategy, emphasizing specialty technologies and recurring revenue from Intelisys & Advisory, is expected to drive future revenue growth, supporting better gross profit margins and net earnings.
  
• The realignment into two segments, Specialty Technology Solutions and Intelisys & Advisory, is designed to capitalize on different margin profiles and improve working capital efficiency, likely contributing to improved earnings and net margins.
  
• Efforts to streamline SG&A expenses in response to market conditions are projected to yield annualized savings, positively affecting net margins and overall profitability.
  
• A focus on strategic acquisitions complemented by share repurchases aims to increase long-term shareholder value through enhanced earnings per share (EPS) growth while maintaining a strong balance sheet.

ScanSource Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ScanSource's revenue will grow by 4.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 2.5% today to 2.4% in 3 years time.
• Analysts expect earnings to reach $87.2 million (and earnings per share of $3.68) by about December 2027, up from $78.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.6x on those 2027 earnings, up from 15.6x today. This future PE is lower than the current PE for the US Electronic industry at 26.0x.
• Analysts expect the number of shares outstanding to decline by 0.5% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.36%, as per the Simply Wall St company report.

ScanSource Future Earnings Per Share Growth

Risks

• Consolidated sales for ScanSource declined 11.5% year-over-year, indicating challenges in maintaining revenue growth amidst a soft demand environment.
  
• Net sales in the Specialty Technology Solutions segment declined 12% year-over-year, which could impact future revenue growth and profitability if this trend continues.
  
• The Brazilian market's underperformance due to FX fluctuations points to potential risks impacting ScanSource's international revenue stability.
  
• Soft demand and a cautious tech spending environment, as acknowledged in the financial outlook, indicate potential challenges in achieving revenue targets and sustaining earnings growth.
  
• Strengthening competition within the technology advisory sector might maintain or drive margin pressures, affecting net earnings and profitability if not controlled.

Valuation

• The analysts have a consensus price target of $57.0 for ScanSource based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $3.7 billion, earnings will come to $87.2 million, and it would be trading on a PE ratio of 18.6x, assuming you use a discount rate of 7.4%.
• Given the current share price of $51.02, the analyst's price target of $57.0 is 10.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.