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On Tuesday, Freedom Capital Markets announced the initiation of coverage on ScanSource (NASDAQ:SCSC) shares, assigning a Buy rating and setting a price target of $46.00. With the stock currently trading at $31.11, InvestingPro analysis suggests the company is undervalued. Guy Hardwick, an analyst at the firm, provided a positive outlook for the company, citing strategic initiatives that are expected to enhance EBITDA margins and generate more stable cash flows.
Hardwick believes that ScanSource’s approach to increasing EBITDA margins over time will lead the market to value the company at higher multiples. With current EBITDA at $117.92 million, the company operates with moderate debt levels, maintaining a healthy debt-to-equity ratio of 0.17. He noted the potential for ScanSource to continue its trend of bolt-on acquisitions, as well as the likelihood of the company capitalizing on tougher financing conditions for private equity deals through increased mergers and acquisitions activity.
The analyst also suggested that aggressive share buybacks could be a sensible alternative to mergers and acquisitions. InvestingPro data confirms management has been actively buying back shares, contributing to a high shareholder yield. He pointed out that ScanSource has significant financial capacity to pursue these strategies, with current leverage suggesting approximately $250 million of capacity and a strong current ratio of 2.11.
According to Hardwick, well-managed distributors like ScanSource are positioned to thrive in an inflationary environment by passing supplier price increases to customers and potentially realizing inventory holding gains. He highlighted that ScanSource is currently trading at multiples that are below its long-term averages—4.9x FY 6/26 EV/EBITDA and 0.24x EV/Sales—which suggests a valuation opportunity. This aligns with InvestingPro analysis, which identifies strong free cash flow yield and attractive revenue multiples. Discover 10+ additional exclusive insights and detailed valuation metrics with InvestingPro’s comprehensive research report.
In other recent news, ScanSource Inc. reported fiscal second-quarter earnings that fell short of analyst expectations. The company announced earnings per share of $0.85, which missed the forecasted $0.8833, and reported revenue of $747.5 million, below the anticipated $866.85 million. Despite these shortfalls, ScanSource reconfirmed its annual guidance, projecting net sales between $3.1 billion and $3.5 billion and adjusted EBITDA in the range of $140 million to $160 million. The company attributed the earnings miss to soft demand and delays in large deals. Analysts have noted the challenging market environment, with firms like Sidoti and Northcoast Research focusing on the impact of these delays and competitive pressures. ScanSource continues to invest in next-gen technologies and acquisitions, aiming for a demand recovery in the second half of the fiscal year. The company highlighted the importance of its hybrid distribution strategy, which combines hardware, SaaS, connectivity, and cloud models. Management remains cautiously optimistic about future performance despite current setbacks.
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