Constellation Software has “Shocking” Upside, says Cormark’s Tse

Constellation Software shareholders have enjoyed a tremendous run, but Cormark analyst Richard Tse says the stock still has “shocking upside”. Cormark analyst Richard Tse says Constellation Software (TSX:CSU) has always been one of his favourite companies, but a rich valuation has at times given him pause when it comes to recommending the company’s stock.

Today, however, a longer view of the Constellation story has Tse rethinking his stance.

The Cormark analyst says given Constellation’s history of exceptional execution, he is looking at the company further out, and applying a Discounted Cash Flow model to its numbers. He says that if EBITDA and revenue continue to grow at more than 20%, Constellation could hit a share price of between $271 and $308. A “blue sky” number of 30% growth, says Tse, could result in a share price north of $350, which he describes as “shocking upside”. Constellation’s revenue and profitability numbers have a historical range between these two numbers.

In a research update to clients this morning, Tse upgraded Constellation Software to a BUY from Market Perform and raised his one-year target price on the stock to $250, up $75 from his previous target of $175.

Toronto-based Constellation was formed by in 1995 by current CEO Mark Leonard, who left the world of venture capital in 1995 to form the company, which has since become one of Canada’s most successful. Constellation, which makes software for the public and private sector, 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. The company has grown its revenue from just $243 million in fiscal 2007 to more than $891-million in 2012, and is one of 12 Canadian techs that pay a dividend.

“Bottom line,” says Tse, “sock this one away and leave it.”

Shares of Constellation Software closed today up 1.2% to $192.25.

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