SCSC

We rate SCANSOURCE, INC. (SCSC) as a Reduce with a composite score of 46.2/100 at a current price of $36.20. The quantitative profile shows weakness across multiple dimensions, suggesting limited upside potential and elevated risk of underperformance relative to peers over the next 12 months.

The rating is primarily driven by strength in value (73th percentile) and investment (51th percentile), which together account for the majority of the composite score. All factors score above the 40th percentile, indicating no material weakness in the quantitative profile. We assign a No Moat rating (25/100), Medium uncertainty, and Poor capital allocation.

Key items to watch: quarterly earnings execution and sector-level competitive dynamics. Any material change in these dynamics could warrant a reassessment of our rating. The moat trend is stable, which suggests the competitive landscape is stable for now.

SCANSOURCE, INC. holds a top-quartile position (#0 of 50) within the Wholesale Trade sector, based on our composite quantitative scoring across quality, value, momentum, and stability factors. The composite score of 46.2/100 places it at rank #2614 in our full 7,333-stock universe. At $963M in market capitalization, SCANSOURCE, INC. is a small-cap player in the Wholesale Trade space, which limits certain scale advantages but may allow for more agile strategic execution.

Revenue contraction of -1% combined with momentum at the 43th percentile paints a cautious picture of the near-term business outlook. The market appears to be pricing in continued challenges, and a catalyst for reversal is not clearly visible from current data.

The margin cascade tells an important story: gross margins of 14% (-8.5pp vs sector) narrow to operating margins of 3% (-0.4pp vs sector) and net margins of 2.4%, yielding a gross-to-net conversion rate of 17%. This conversion rate is typical for the sector, suggesting a standard cost structure without notable efficiency advantages or disadvantages.

At a current price of $36.20, SCANSOURCE, INC. appears undervalued relative to its fundamentals. Our value factor score of 73/100 reflects a composite assessment across multiple valuation metrics including price-to-earnings, price-to-book, EV/EBITDA, and price-to-sales ratios relative to both sector peers and the broader market. The stock screens as attractively priced on a majority of these measures, suggesting the market may be underappreciating the underlying fundamentals.

The stock currently trades at a P/E of 11.3x (a 41% discount to the sector median of 19.1x), EV/EBITDA of 7.1x (near the sector median), P/B of 0.9x, P/S of 0.3x. The below-sector P/E suggests possible undervaluation or the market pricing in near-term headwinds.

We assign a Medium uncertainty rating to SCANSOURCE, INC.. The stock presents a balanced risk profile: the combination of leverage (91% D/E) and thin margins (2.4% net) amplifies downside risk. While not risk-free, the core business fundamentals are adequate to withstand moderate economic stress, and the range of potential outcomes around our fair value estimate is manageable.

Specific risk factors that inform our assessment include: the combination of leverage (91% D/E) and thin margins (2.4% net) amplifies downside risk. Each of these factors independently widens the distribution of potential outcomes, and in combination they create a risk profile that demands careful position sizing. The stability factor at the 49th percentile and quality factor at the 43th percentile provide a quantitative summary of the overall risk landscape.

We identify limited risk mitigants at this time, which contributes to our medium uncertainty assessment. Investors should monitor for improvement in balance sheet metrics, margin stability, and business predictability that could warrant a downgrade in our risk assessment over time.

We rate SCANSOURCE, INC.'s capital allocation as Poor. Key concerns include suboptimal returns on capital. Exemplary capital allocators generate ROE above 20% and maintain conservative leverage — SCANSOURCE, INC. significantly underperforms these benchmarks, raising questions about management's ability to create shareholder value.

Investors should scrutinize management's reinvestment decisions and balance sheet trajectory before committing capital. Poor capital allocation often compounds over time: overlevered balance sheets limit strategic flexibility, while low returns on capital destroy shareholder value. We would need to see sustained improvement in profitability metrics and balance sheet discipline before considering an upgrade.

In summary, SCANSOURCE, INC. receives a Reduce rating with a composite score of 46.2/100 (rank #2614 of 7,333). Our quantitative framework assigns a No Moat (25/100, trend: stable), Medium uncertainty, and Poor capital allocation. The average factor score across quality, value, momentum, stability, and investment is 52/100.

Our analysis does not support a constructive view on SCANSOURCE, INC. at this time. The combination of limited competitive advantages, medium uncertainty, and poor capital allocation suggests unfavorable risk-reward at current levels. We recommend investors avoid new positions and existing holders consider reducing exposure.