The Take — Good operator, full price. The stock already discounts the bull case.
Not a peak-cycle trap like AVT — but not deep value either. ScanSource's top line has gone nowhere for a decade (FY17 $3.57B → FY26 $3.23B, ~0% trend) while the business quietly re-mixed toward higher-margin, capital-light recurring revenue (Intelisys agency commissions; recurring now 34% of gross profit). That re-mix is real: EBITA margin has run 3.65% over the last five years vs 3.24% over ten, and the balance sheet is clean (net debt ~$13M at June, ~0x EBITDA). FY26 FCF of $114M and $98M of buybacks (≈8% of the float) are shareholder-friendly. This is a well-run company.
The problem is the price, not the business. We normalize EBITA at 3.50% — above the 10-yr average, crediting the mix shift, but below the FY22–23 4.0% peak (pandemic-era supply tightness + price). Base case grows 8% in FY27 (mid of the 6–10% guide) then fades to 2.5%; that is worth $48.23. Bull — 4.0% margins on sustained mid-single-digit growth, essentially management's EBITDA trajectory delivered and held — is $58.48, i.e. the current price. The reverse DCF says $60 needs a 4.5% EBITA margin forever, a level ScanSource has never printed in ten years, or a 8.1% WACC.
ROIC vs WACC settles it: on all invested capital (including ~$300M of acquired goodwill/intangibles) normalized after-tax ROIC is ~8.8% — roughly equal to the 9.4% WACC. Ex-goodwill it's mid-teens, which is why the company's own "adjusted ROIC" reads 14.7%. But acquisitions are capital: MicroAge ($220.5M cash, closed in the September quarter, revolver-funded, financials undisclosed) adds another ~25% to the capital base for an unknown return. We treat it as value-neutral (paid fair value); if it earns below WACC it subtracts.
Call: HOLD / no new money — accumulate ≤$48, add aggressively ≤$42 (≈ bear-case floor + buyback support); trim above ~$65 (52-wk high $66.78 set on the Aug 20 print). The PEG screen is flattered by buyback-driven EPS growth (diluted shares ~−14% in two years) on flat revenue. Options: SCSC chains are thin; for holders, a covered call ~10% OTM after the Q1-FY27 print (early Nov, date not yet announced; Nov 6 last year) monetizes the full valuation — no naked/bearish structure is worth the liquidity cost here. The upside surprise to watch: MicroAge disclosure showing ≥15% pre-tax returns and EBITDA guidance moving to ≥5% margin.
What the "inventory" really is: $522M of hardware inventory + $770M of receivables − $753M payables ≈ $540M of operating working capital (16.7% of sales) — plus ~$300M of acquired goodwill/intangibles for the Intelisys/agency book. The agency side needs almost no working capital; the hardware side is a classic WC-funded distributor whose cash flow is counter-cyclical (FY24: +$363M FCF as inventory unwound).
WACC and the normalized margin are the only drivers that matter; working-capital intensity and terminal assumptions barely move value. Nothing in the realistic range reaches $60 except the high-margin/low-WACC corner of the grid.
Red = >15% below price; amber = within ±15%; green = >15% above. Reverse DCF: at base WACC 9.36% the price requires a 4.47% normalized EBIT margin forever; at the base margin it requires a WACC of 8.06%.
Cycle history — EBITA margin and working-capital intensity
Bars = EBITA margin (GAAP + intangible amortization + FY20 goodwill impairment) (green = above normalized). Orange row = operating working capital (receivables + inventory − payables) as % of sales. Dashed = 10-yr normalized level.
Normalization worksheet, working capital & FCF ($M)
FY
Sales
GAAP EBIT
Intang. amort
Impair.
EBITA
EBITA %
Op. NWC
NWC/Sales
Pre-tax ret. on NWC
OCF
FCF
SBC
FCF−SBC
FY17*
3,568
88.2
15.5
0
103.7
2.91%
655
18.4%
15.8%
FY18
3,165
69.0
18.7
0
87.7
2.77%
679
21.5%
12.9%
31
FY19
3,250
94.7
17.9
0
112.6
3.46%
589
18.1%
19.1%
16
FY20
3,048
-65.0
20.0
119
74.0
2.43%
444
14.6%
16.7%
182
FY21
3,151
61.5
19.5
0
81.0
2.57%
404
12.8%
20.0%
117
FY22
3,530
122.2
17.9
0
140.1
3.97%
630
17.8%
22.2%
-124
-131
11.7
-143
FY23
3,788
135.9
16.7
0
152.6
4.03%
820
21.6%
18.6%
-36
-46
11.2
-57
FY24
3,260
90.3
15.7
0
106.0
3.25%
506
15.5%
20.9%
372
363
9.5
354
FY25
3,041
85.2
19.2
0
104.4
3.43%
521
17.1%
20.0%
112
104
11.1
93
FY26
3,226
98.6
16.7
0
115.3
3.57%
539
16.7%
21.4%
123
114
14.1
100
10-yr avg
3,303
78.1
107.7
3.24%
17.4%
81 (5y)
69 (5y)
Sources: SEC XBRL companyconcept (RevenueFromContract…, OperatingIncomeLoss, AmortizationOfIntangibleAssets, GoodwillImpairmentLoss, AR, Inventory, AP, continuing-ops OCF) and FY26 8-K Ex.99.1; capex/SBC from stockanalysis FY22–26. *FY17 not recast for the FY20 Latin-America divestiture (revenue/WC include discontinued ops; FY18 WC also pre-recast). EBITA keeps SBC as an expense; company "non-GAAP operating income" (FY26 $119.7M) additionally excludes ~$4M of acquisition/other items.
Normalization choices. 10-yr EBITA margin 3.24% (FY20 ex-$119M goodwill impairment); 5-yr 3.65% includes the FY22–23 supply-crunch peak (~4.0%). Normalized at 3.50% — a deliberate tilt toward the recent mix (Intelisys recurring commissions ≈ 34% of GP). On FY26 sales → normalized EBITA ≈ $113M. Cross-check vs management: FY27 adjusted EBITDA guide $158–165M (4.6–4.65%) adds back SBC (~$14M), depreciation (~$7M) and other items (~$11M); stripped to our EBITA definition that's ~$128M, or ~3.7% — slightly above normalized, consistent with an early-upcycle year.
Working-capital intensity: operating NWC averaged 17.4% of sales (12.8%–21.6%); model uses sales-to-capital 5.0 (20¢ per incremental $1 of sales, incl. a little fixed capital). Pre-tax return on NWC 13–22% — healthy, but goodwill-heavy acquisitions dilute it at the total-capital level.
FCF reality: FY22–26 cumulative FCF $404M (avg $81M/yr), but it's lumpy: −$177M across FY22–23 (WC build), +$363M in FY24 (release). The 5-yr average after SBC is ~$69M — a ~5.6% yield on today's market cap, about what a fairly priced, low-growth distributor should yield at a 9.4% WACC.
ROIC vs WACC
FY
EBITA
NOPAT (27%)
Invested capital
ROIC
ROIC ex-goodwill/intang.
vs WACC 9.36%
FY22
140.1
102.3
1,056
9.7%
13.5%
+0.3pt
FY23
152.6
111.4
1,213
9.2%
12.0%
-0.2pt
FY24
106.0
77.4
893
8.7%
11.9%
-0.7pt
FY25
104.4
76.2
927
8.2%
12.0%
-1.1pt
FY26
115.3
84.2
933
9.0%
13.5%
-0.3pt
Normalized (FY26 sales)
112.9
82.4
933
8.8%
13.2%
-0.5pt
Invested capital = equity + debt + leases − cash (book). Ex-goodwill/intangibles ROIC is high (the hardware/agency engine is good); total ROIC ≈ WACC because acquired goodwill earns little incremental return. Terminal stable ROIC set at 11% (modest moat from agency/recurring mix).
Base-case FCFF ($M)
Year
Growth
Revenue
EBIT %
EBIT
NOPAT
Reinvest (WC+cap)
FCFF
PV
FY27
+8.0%
3,484
3.65%
127
93
52
41
38
FY28
+4.0%
3,624
3.60%
130
95
28
67
56
FY29
+3.5%
3,750
3.55%
133
97
25
72
55
FY30
+3.0%
3,863
3.53%
136
100
23
77
54
FY31
+3.0%
3,979
3.52%
140
102
23
79
50
FY32
+3.0%
4,098
3.50%
143
105
24
81
47
FY33
+3.0%
4,221
3.50%
148
108
25
83
45
FY34
+2.5%
4,327
3.50%
151
111
21
89
44
FY35
+2.5%
4,435
3.50%
155
113
22
92
41
FY36
+2.5%
4,546
3.50%
159
116
22
94
38
Terminal
g 2.5%, stable ROIC 11.0% → reinvest 23% of NOPAT, WACC 9.36%
TV 1,341
548
PV explicit 468 + PV terminal 548 = operating assets 1,016. Terminal share 54% (below the 70% flag; r 9.36% > g 2.5%). Tax 27% (guide 27.5–28.5%). Reinvestment = Δsales ÷ 5.0. MicroAge excluded from both operations and net debt (value-neutral at the $220.5M paid); post-close net debt ~$235M.
Cost of capital
Risk-free (10Y UST after the Sept-2026 spike)
5.20%
Mature ERP + revenue-weighted country risk premium
4.40% + 0.35%
Bottom-up unlevered beta (specialty tech/electronics distribution, Damodaran industry averages)