Friday, KeyBanc Capital upgraded ScanSource, Inc. (SCSC) shares to Buy from Hold with a price target of $32. Analyst Anthony Kure upgraded the stock as recent weakness provides compelling entry point.
The analyst believes the recent weakness in the shares provides investors a compelling entry point as the near-term margin headwinds are now likely priced in, but does not accurately reflect the benefits from multiple growth opportunities over the next 12-24 months, in his opinion.
While the analyst still thinks the recent weakness in gross and operating margins will persist into second quarter of fiscal 2010, at current levels he thinks the risk associated with further deterioration in gross and operating margins is outweighed by what he believes will likely be a modestly improving demand environment through fiscal 2010 and beyond.
The analyst maintained his fiscal 2010 estimate of $1.68, recently lowered after the first quarter of 2010 earnings report on October 22, which includes his second quarter of 2010 estimate of $0.41 vs. $0.43, and he is establishing a price target of $32.
At current levels, SCSC shares sell at 15.9x FTM P/E based on the analyst's fiscal 2010 estimate, slightly below the mid-point of its five year historical range of 14-19x. On a FTM P/E basis, the analyst's price target of $32 represents 19x his fiscal 2010 estimate.
In the analyst's view, SCSC would benefit from multiple secular trends over the next few years, which he thinks will ultimately contribute to growth in absolute operating profit dollars as a result of overall top-line growth.
While the analyst does not anticipate much operating margin expansion as a result of these factors, he believes the current valuation, combined with these long-term growth trends, provides investors meaningful upside to the shares going forward.
Currently, SCSC is down $2.47 or 8.35% and trading at $27.10.
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