Today we have an extremely speculative idea.: take shares in high-tech reseller ScanSource (NASDAQ: SCSC), in order to make money on a possible purchase of a company.
Growth potential and validity: 20% behind 15 Months; 8% per annum during 10 years.
Why stocks can go up: because according to the logic of things, the company should be bought.
How do we act: we take shares now by 31,40 $.
When creating the material, sources were used, inaccessible to users from the Russian Federation. We hope, Do you know, what to do.
No guarantees
Our reflections are based on the analysis of the company's business and the personal experience of our investors, but remember: not a fact, that the investment idea will work like this, as we expect. Everything, what we write, are forecasts and hypotheses, not a call to action. To rely on our reflections or not – it's up to you.
And what is there with the author's forecasts
Research, like this and this, talk about, that the accuracy of target price predictions is low. And that's ok: there are always too many surprises on the stock exchange and accurate forecasts are rarely realized. If the situation were reversed, then funds based on computer algorithms would show results better than people, but alas, they work worse.
So we're not trying to build complex models.. The profitability forecast in the article is the author's expectations. We specify this forecast for the landmark. As with the investment idea in general, readers decide for themselves, it is worth trusting the author and focusing on the forecast or not.
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Investment editorial office
What the company makes money on
The company is engaged in the resale of computer hardware and software. She mainly sells physical goods.. According to the annual report, business is divided into the following segments:
- Payment Solutions, mobile computing, data storage, network operation, cyber security and protection — 69,03%. Segment operating margin — 1,3% from its proceeds.
- Solutions in the field of voice and video communications, cloud computing - 30,97%. Segment operating margin — 4,58% from its proceeds.
Recently, the company began to consider segment sales a little differently., than usual, but seriously it didn't change the picture.
The end consumers of the company's products are enterprises from almost all industries, but these goods are sold through resellers independent of ScanSource.
The USA accounts for 90,58% of the company's total revenue, and 9,42% - to others, unnamed countries.
Arguments in favor of the company
The main and only advantage of the company is that, that they can buy. For in the eyes of a potential buyer, ScanSource has a certain list of advantages.
Her stock has dropped a lot.. Back in November 2021 they cost 39 $, but then dropped to 31,40 $. And now they are much cheaper., than in 2017, when they were asked for 44 $.
Sustainability. Company, like its larger rival Synnex, should become the beneficiary of the digitalization of the corporate sector. Anyway, stable demand for high-tech hardware and software will make ScanSource's business quite stable.
This song will last forever. An endless pandemic will make the state of shortage and lack of equipment normal - which will greatly increase the demand for the services of intermediaries like ScanSource. And maybe, even create conditions for a significant increase in their margins.
Diversification of clients. No client gives more 6% proceeds. This strengthens the bargaining position of the company, which is very important in the resale business.
It is inexpensive. P / S at the company 0,25, P / It's about 18,57. Future P / E she has about 10, because the current result distorts previous losses. Capitalization is very small - 823,66 million dollars.
At the same time, in its current form, the company is meaningless for its shareholders.. According to the terms of its agreements with ScanSource creditors, it is forbidden to pay dividends, although if she spent about 60% its final profit on payments, then its dividend yield would exceed 6%. At the same time, its quotes have been marking time for many years..
It seems to me, that in its current form the company can attract the attention of an activist investor, who will force its management to sell the company. And such a sale is very likely. The same Synnex may well buy ScanSource, to gain a foothold in the resale market of high-tech equipment and software. Moreover, the hardware and software resale industry is striving for consolidation and ScanSource is a logical target for absorption..
What can get in the way
With the exception of the prospect of a possible sale, there is nothing interesting here. It is extremely low-margin — the final margin is 1,3% from revenue - an intermediary business with stagnating sales.
The company's small size limits its ability to increase prices.. Lending conditions prevent it from introducing dividends, and she's in debt. Removal of these restrictions, although possible in theory, but it definitely does not depend on the ScanSource itself. Temporary improvement with logistical problems in the world can hit her business harder, than for such giants, как Synnex.
Again, a potential buyer like Synnex might try to push the company out of the market first., bringing it to the brink of bankruptcy, - and as a result, buying ScanSource is even cheaper, what is she worth now.
So the only hope here is, that the company will be bought with an acceptable premium to the current price.
What's the bottom line?
Take the shares now for 31,40 $, and then we have two options:
- waiting for the price to rise 38 $. This is a reasonable premium to the current price of the company in case, if there is a buyer. Think, that this will happen within the next 15 Months. There is also a possibility, that the company's shares will be pumped up to the desired level by a crowd of investors, who will buy into the cheapness of ScanSource and the topic of "digitalization of the economy". This is very likely, given the small capitalization of ScanSource. But, in my opinion, the most reasonable would be to rely on the purchase of the company by someone larger due to the trend towards industry consolidation;
- not ideal - hold stocks next 10 years. Maybe, during this time, the company will be able to persuade creditors to revise the conditions for obtaining financing - and will be able to introduce dividends. Again, at longer distances, the likelihood of buying ScanSource increases.
But still remember that, that this idea is speculative, and do not invest money in ScanSource, if you are not willing to endure, that the company's shares will mark time for many years, if our forecast does not come true.
