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By George Leong, B.Comm. Published : July 12, 2019
SCSC Stock: A Value Play Looking to Jump Start Revenues
Taking a look at stock market trash bin, I came across small-cap technology stock ScanSource, Inc. (NASDAQ:SCSC). ScanSource stock is currently in the dumps, down 28% from its 52-week high and sitting at just above its range low.
The company sells a broad range of technology products and solutions from over 500 suppliers to over 35,000 clients in the United States, Canada, Latin America, and Europe.
A look at the chart shows SCSC stock facing multiple resistance at $44.00-$45.00 in the period from 2014 to 2018, prior to the subsequent weakness to current levels.
ScanSource stock has major technical support in place at around $30.00. The stock needs to hold this level or face a further downside slide towards $25.00.
Chart courtesy of StockCharts.com
If SCSC stock can hold, it would give ScanSource time to re-energize its revenue side and drive up profitability.
What ScanSource, Inc. Needs to Do
ScanSource’s revenue side doesn’t jump out at you, but it has edged higher in four straight years, albeit at a slow rate.
The growth from fiscal 2014 to fiscal 2018 (ending in June) represents a compound annual growth rate (CAGR) of a modest 7.35%. ScanSource will need to ramp this higher.
| Fiscal Year | Revenue (Billions) | Growth |
| 2014 | $2.91 | |
| 2015 | $3.22 | 10.5% |
| 2016 | $3,54 | 10% |
| 2017 | $3.57 | 0.8% |
| 2018 | $3.85 | 7.8% |
(Source: “ScanSource, Inc.,” MarketWatch, last accessed July 11, 2019.)
Revenue growth is estimated at a mere 1.8% to $3.92 billion in fiscal 2019 followed by three percent to $4.04 billion in fiscal 2020. (Source: ScanSource, Inc. (SCSC),” Yahoo! Finance, last accessed July 11, 2019.)
A plus is that ScanSource has been producing positive earnings before interest taxes depreciation and amortization (EBITDA), profits, and free cash flow (FCF).
ScanSource grew its EBITDA in three of the last four years, including growth of 16.8% to a five-year high in fiscal 2018:
| Fiscal Year | EBITDA (Millions) | Growth |
| 2014 | $116.0 | |
| 2015 | $119.4 | 2.9% |
| 2016 | $116.2 | -2.7% |
| 2017 | $119.7 | 3.0% |
| 2018 | $139.82 | 16.8% |
(Source: MarketWatch, op. cit.)
As far as the profitability, ScanSource is delivering earnings-per-share (EPS) profits on both a generally accepted accounting principles (GAAP) and adjusted basis.
| Fiscal Year | GAAP Diluted EPS | Growth |
| 2014 | $2.86 | |
| 2015 | $2.27 | -20.6% |
| 2016 | $2.38 | 4.9% |
| 2017 | $2.71 | 13.9% |
| 2018 | $1.29 | -42.4% |
(Source: Ibid.)
GAAP EPS fell to a five-year low in fiscal 2018.
ScanSource is expected to earn an adjusted $3.47 per diluted share in fiscal 2019, up from $3.11 per diluted share in fiscal 2018, and follow with $3.70 per diluted share in fiscal 2020. (Source: Yahoo! Finance, op. cit.)
The company is also generating positive FCF, but recorded a 77% decline in fiscal 2018:
| Fiscal Year | FCF (Millions) | Growth |
| 2014 | $36.5 | |
| 2015 | $54.8 | 50% |
| 2016 | $40.1 | -26.7% |
| 2017 | $86.0 | 114.4% |
| 2018 | $19.7 | -77.1% |
(Source: MarketWatch, op. cit.)
Analyst Take
The fundamentals and estimates show ScanSource, Inc. has plenty of work to do to shore up the business and attract investors.
At first glance, ScanSource stock appears cheap, trading at 8.6 times its fiscal 2020 EPS and a price-earnings-to-growth ratio of only 0.67, but there is a reason for the low valuation.
If ScanSource can address its anemic revenue growth, SCSC stock could attract buyers and allow for a higher multiple.
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