DSG is a software provider targeting logistics intensive customers. The recent uncertainty around trade has put some pressure on DSG’s customers’ near-term growth prospects. However, given the critical nature of the solutions, DSG’s management sees a limited negative effect on the company’s overall business. DSG’s business continues to experience a long-term tailwind due to the rise of e-commerce. DSG’s solutions have many attractive characteristics of a great business, including a high degree of recurring revenue, strong pricing power, low capital expenditure and high switching costs. The company has been quite consistent in its ability to execute an acquisitive growth playbook by targeting companies with similar economics. In fact, the company has demonstrated a track record of allocating capital by consistently growing sales and earnings by double digits over the years. A meaningful portion of DSG’s premium valuation was driven by the expectation that they can continue to execute this growth playbook in the foreseeable future, which we think is highly likely. We are maintaining our rating at “A-”.

ATS’s capital allocation policy prioritizes the vast majority of cash towards reinvestment and growth, and the company has been quite successful with its acquisitive growth playbook over the years. However, the recent operating results have been quite poor, driven by a combination of weak organic growth and a one-time settlement with a large EV customer from the transportation segment. Consequently, the balance sheet suddenly became over-leveraged relative to the historical trend because of the significant decline in earnings. In addition, the near-term uncertainty driven by tariffs also puts pressure on the company’s ability to grow. That being said, with backlog and bookings remaining healthy, we think the worst is already behind ATS for now. To remain conservative, we are downgrading our rating by one notch to ‘B’.

The company’s growth also slowed down while still generating negative free cash flow and profitability. In addition, valuation for Fintech companies declined meaningfully, making the share price today still much lower than its IPO price in 2019. The company has been acquisitive in the past, but we think the track record of M&A is quite poor, given a meaningful goodwill write-off LSPD recently reported in the most recent quarter. It has a strong balance sheet with almost a quarter of the company’s market capitalization in cash. We see potential for LSPD to be acquired by other large Fintech companies. That being said, that catalyst alone can’t be a worthwhile investment thesis for LSPD. To be conservative, we are downgrading our rating by one notch to a ‘C+‘.