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Is ScanSource (NASDAQ: SCSC) Undervalued or Overvalued?

Written by Wealth Daily Research Team
Posted August 12, 2019

Today is Monday, August 12, 2019 and here’s your daily small cap valuation.

ScanSource (NASDAQ: SCSC) is a small-cap stock that could have a lot of potential. But it’s hard to value smaller companies like this. Conventional valuation metrics like price-to-earnings (P/E) ratio, profit margin, and return on equity (ROE) may not be available for them.

To get a sense of ScanSource's true valuation, let’s compare it to its industry peers — and to itself one year ago. We’ll look at four small cap valuation metrics…

Price-to-Book Value (P/B) Ratio

ScanSource's price-to-book value (P/B) ratio of 0.8978 is 21.93% lower than its industry average of 1.15. That’s good. A low P/B ratio indicates that the company has a solid balance sheet — and that based on its balance sheet, the stock is trading for unusually cheap.

Free Cash Flow Yield (FCF/Enterprise Value)

ScanSource's free cash flow yield (FCF/EV) of -0.37% is 104.27% lower than its industry average of 8.67%. That’s not good. This metric compares free cash flow (the amount of cash left over after all expenses and capital expenditures have been paid) with enterprise value (a comprehensive alternative to market cap that includes cash and debt).

A low free cash flow yield indicates that a company is performing inefficiently — or that it’s struggling with the debt on its books.

Earnings per Share (EPS) Growth

ScanSource has grown its earnings per share (EPS) by 34.36% in the last year. That’s good. Many smaller, newer companies have negative earnings for a few years, but that’s okay as long as earnings are going up over time.

Gross Margin Growth

ScanSource has grown its gross margin by 6.12% in the last year. That’s good. Many young small caps are unprofitable, so net profit margin isn’t always a useful measure. But a growing gross margin means that the company’s operations are getting more and more profitable over time.

The Takeaway

ScanSource scored favorably on 3 of our 4 valuation metrics. With this in mind, we believe the stock is slightly undervalued.

Editor’s Note: We’ve been keeping an eye on a set of small-cap stocks that are a better value than ScanSource. These stocks have the potential for bigger gains — and they’re far less risky than the speculative small caps many investors gamble on. Enter your email below to learn more.

P.S. Got another small-cap stock you want us to test with our valuation metrics? Leave the ticker symbol in the comments below.

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