Constellation Software Still a Buy, says Versant’s Liston

On Wednesday, Constellation Software (TSX:CSU) reported its Q1, 2012 results. Revenue was up 10% from 2011’s topline of $178-million to $195-million. The company’s net income for the quarter was down from $62-million to just was $14-million, but last year’s results were skewed by a which included a deferred income tax recovery, which the company described as “unusual”.

While the market has come to expect superior performance from Constellation, which has more than doubled its annual revenues since 2008, Versant analyst Tom Liston’s expectations for the company’s Q1 were even higher. He thought revenue would top $200-million and Constellation would earn $1.80 per share instead of the $1.50 they posted. Still, he says, Constellation is a world class company with a top-notch management team, and the stock should be a core holding for investors. In a research update to clients yesterday, Liston maintained his BUY rating on Constellation, but lowered his twelve-month target slightly, from $107 to $105.

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Toronto-based Constellation was formed by current CEO Mark Leonard, who left the world of venture capital in 1995 to form the company, which has since become one of the most profitable and successful in the recent history of Canadian tech. Constellation, which makes software for the public and private sector, is clear about its strategy. The company grows through acquisition, looking to acquire best of breed companies across different verticals. Constellation is involved in various niches on the public and private side from software for housing authorities, transportation agencies, and software for large home builders. On the strength of this strategy, the company has grown its revenue from just $243 million in fiscal 2007 to more than $773-million in 2011.

One of the key reasons for Liston’s optimism about Constellation is the amount of cash the company generates and what they do with it. He points out that trailing twelve month cash flow from operations has more than doubled in the past three years, from $59.8 million in Q1/F09 to $130.5 million in Q1/F12. Constellation management decided earlier this year it would declare a regular dividend, joining just a handful of Canadian techs who do so.

Shares of Constellation Software closed Thursday down $6.60 to $88.80.

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