IoT And Robotics Will Fuel Digital Transformation Trends

Key Takeaways

• Heavy investment in emerging technologies and digital solutions positions ScanSource for growth in automation, digital transformation, and recurring revenue streams.
  
• Operational efficiencies, expanded partnerships, and focus on integrated solutions support higher margins, earnings stability, and reduced supplier risk.
  
• Heavy dependence on hardware and M&A-driven growth exposes profitability to industry shifts, strong competition, supplier consolidation, and instability in key international markets.

Catalysts

Engages in the distribution of technology products and solutions in the United States and internationally.

• Investments in emerging technologies-such as the expanding Internet of Things (IoT), robotics, drones, private cellular networks, and converged hardware/software/service solutions-are positioning ScanSource to capture growth from accelerating automation and digital transformation in sectors like retail, logistics, and healthcare, which should drive both top-line revenue growth and an expanded addressable market.
  
• Strategic focus on increasing recurring revenue streams (with a stated goal to lift recurring gross profit contribution toward 50% via organic growth and targeted M&A) leverages the ongoing enterprise shift to cloud, software, and as-a-service models-likely supporting higher net margins and greater earnings stability over time.
  
• Deployment of business development initiatives (e.g., the Launch Point team) and partnerships with innovative technology growth companies should accelerate the addition of new high-growth suppliers, enabling faster cross-selling and expansion into new solution verticals-bolstering revenue growth and de-risking supplier concentration.
  
• Continued investments in digital platforms, supply chain automation, and operational efficiencies are expected to reduce SG&A expenses, support operating margin expansion, and boost overall profitability-especially as the mix shifts to higher-margin recurring solutions.
  
• ScanSource's ability to support complex, converged technology deployments as a solutions aggregator positions the company to benefit from enterprises' growing needs for integrated, secure connectivity (particularly in an increasingly remote/hybrid environment), driving durable demand for ScanSource's offerings and sustaining revenue and margin growth.

ScanSource Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ScanSource's revenue will grow by 4.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.4% today to 2.7% in 3 years time.
• Analysts expect earnings to reach $93.7 million (and earnings per share of $4.35) by about September 2028, up from $71.5 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 13.5x on those 2028 earnings, up from 13.2x today. This future PE is lower than the current PE for the US Electronic industry at 23.9x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.58%, as per the Simply Wall St company report.

ScanSource Future Earnings Per Share Growth

Risks

• The company's reliance on hardware distribution remains significant, and while leadership emphasizes convergence with software and services, segment gross margins show that hardware still drives the majority of revenue-leaving ScanSource exposed to industry-wide declining hardware margins and the commoditization trend, which could compress both profitability and earnings.
  
• The Intelisys & Advisory segment, touted as a growth engine for higher-margin recurring revenues, delivered negative adjusted EBITDA growth this year and lost business to PE-backed competitors willing to forego margins for market share; prolonged competition and slow turnaround in this segment could continue to drag on overall net margins and future earnings growth.
  
• Supplier consolidation, as highlighted in the discussion of the Zebra-Elo deal, is identified as a risk by management; further OEM consolidation could reduce ScanSource's supplier base, increasing supplier bargaining power and eroding distributor margins, pressuring both revenue and profitability.
  
• The company's strategy to increase recurring revenue and enter emerging segments (like managed connectivity and cloud solutions) is heavily dependent on acquisitions, with recent improvements in recurring revenue mix driven more by small acquisitions than organic growth-any slowdown or misstep in M&A could impede gross profit and long-term GP growth targets.
  
• International operations, especially in Brazil, remain vulnerable to economic and political instability and FX headwinds; despite strong local currency performance, ongoing macroeconomic pressures in Brazil could undermine consolidated revenues and earnings.

Valuation

• The analysts have a consensus price target of $58.0 for ScanSource based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $66.0, and the most bearish reporting a price target of just $50.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.5 billion, earnings will come to $93.7 million, and it would be trading on a PE ratio of 13.5x, assuming you use a discount rate of 8.6%.
• Given the current share price of $43.22, the analyst price target of $58.0 is 25.5% 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.