3 Reasons to Avoid SCSC and 1 Stock to Buy Instead

ScanSource’s stock price has taken a beating over the past six months, shedding 22.5% of its value and falling to $39.58 per share. This was partly driven by its softer quarterly results and might have investors contemplating their next move.

Is there a buying opportunity in ScanSource, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.

Why Do We Think ScanSource Will Underperform?

Even though the stock has become cheaper, we're sitting this one out for now. Here are three reasons why SCSC doesn't excite us and a stock we'd rather own.

1. Revenue Spiraling Downwards

Examining a company’s long-term performance can provide clues about its quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, ScanSource’s demand was weak and its revenue declined by 1.5% per year. This wasn’t a great result and signals it’s a low quality business.

2. EPS Barely Growing

Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.

ScanSource’s EPS grew at an unimpressive 5.4% compounded annual growth rate over the last five years. On the bright side, this performance was better than its 1.5% annualized revenue declines and tells us management adapted its cost structure in response to a challenging demand environment.

3. Previous Growth Initiatives Haven’t Impressed

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

ScanSource historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 8.2%, somewhat low compared to the best business services companies that consistently pump out 25%+.

Final Judgment

We see the value of companies helping consumers, but in the case of ScanSource, we’re out. After the recent drawdown, the stock trades at 10.7× forward P/E (or $39.58 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are better investments elsewhere. We’d recommend looking at a top digital advertising platform riding the creator economy.

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