Constellation Software has modest upside, says Industrial Alliance

A rich valuation is tempering some positives Industrial Alliance analyst Blair Abernethy sees in Constellation Software (Constellation Software Stock Quote, Chart, News: TSX:CSU).

On April 27, Constellation Software will report its Q1, 2016 results. Abernethy says he expects the company will posted Adjusted EPS of $4.79 on revenue of $507.7-million, an assessment that it higher than the street consensus expectation of $4.42 in earnings on $495.7-million in revenue.

Abernethy says because of recent macro volatility, he sees the potential for better deal volume and a better pricing environment for Constellation Software in 2016. He also sees improved operating margins driven by scale, faster organic revenue growth, and the potential for larger, more transformative acquisitions. But the analyst cautions that the company’s ~6.5x forward EV/Recurring revenue is “relatively rich”.

In a research update to clients today, Abernethy maintained his “Hold” rating and one-year price target of $540.00 on CSU, implying a return of 2.7 per cent at the time of publication, including dividend.

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“While we maintain our Hold rating, we do see some potential positive catalysts for the stock,” says Abernethy. “We remain confident that Constellation has the opportunity to continue to drive material revenue growth and steadily scale up its business over the next few years.”