Raymond James downgrades ScanSource stock as valuation hits multiyear highs

On Thursday, Raymond James adjusted its stance on ScanSource (NASDAQ: NASDAQ:) stock, moving the rating from Outperform to Market Perform.

The firm’s decision comes as the company’s shares approach the price target after experiencing over a 20% increase since the start of the year. This surge has elevated the company’s valuation metrics to their highest in several years.

Despite the softness in core end markets, the firm acknowledges ScanSource’s effective management during this period, which has resulted in robust cash generation exceeding $300 million since the first quarter of fiscal year 2024.

Additionally, the return on invested capital (ROIC) has hit mid-term targets, around 15%, and there has been a concentrated effort on share repurchases.

The analyst from Raymond James noted that while ScanSource has displayed commendable execution, with strong cash generation and achieving ROIC goals, the current market conditions prompt a more cautious outlook.

The focus on investing in the agency business for vertical integration is expected to increase the use of incremental cash. The firm is waiting for evidence that these investments will yield returns before reassessing the stock’s potential.

The report further explains that key financial metrics such as cash flow and ROIC may have reached their peak for the near term, especially in the challenging macroeconomic environment. With the valuation metrics also at peak levels, the analyst believes it is a prudent move to reassess the position on ScanSource shares at this juncture.

Raymond James highlights that the decision to downgrade ScanSource is based on the anticipation of the company’s investment in its agency business and the potential impact on cash usage. The firm remains watchful for signs that these strategic moves will enhance returns.

In conclusion, Raymond James has shifted its recommendation for ScanSource to Market Perform from Outperform, signaling a neutral perspective on the stock’s immediate future. The firm will continue to monitor the company’s financial performance and strategic investments to determine the long-term outlook for the stock.

In other recent news, ScanSource, Inc. has reported a mixed bag of results for its third quarter. Despite a 15% decline in net sales for its hardware business due to decreased demand, the company showcased strong margins and robust free cash flow.

The Intelisys segment, on the other hand, experienced a 7% year-over-year increase in end-user billings, reaching an annualized $2.68 billion, with significant growth in its CCaaS and UCaaS offerings.

ScanSource also made headlines with the acquisition of Resourcive, a technology advisory firm, to enhance its service offerings. This acquisition has led to the establishment of ScanSource Channel Advisors, a new business division that will operate independently from ScanSource’s Intelisys business. The Resourcive team, under the leadership of Tom Gesky, will join ScanSource, with Mark Morgan leading as President of ScanSource Channel Advisors.

In other developments, Intelisys, a ScanSource company, has appointed Ken Mills as its new president. Mills brings a wealth of experience from notable companies such as Dell Technologies (NYSE:) and Cisco (NASDAQ:). He is expected to spearhead the company’s strategic direction and sustainable growth.

ScanSource has also announced a $100 million share repurchase and plans to expand its agency channel despite potential channel conflicts. These recent developments are part of ScanSource’s broader strategy to prioritize Intelisys and strong free cash flow for fiscal year 2024.

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