Constellation Software is looking fully valued, says Industrial Alliance

It’s run has been nothing less than one of the great technology stories in the history of the Canadian public markets, but Industrial Alliance Securities analyst Blair Abernethy thinks that despite ever-improving numbers, Constellation Software (Constellation Software Stock Quote, Chart, News: TSX:CSU) is looking fully valued.

On Wednesday, Constellation Software reported its Q3, 2016 results. The company earned (U.S.) 67.4-million on revenue of $546-million, a topline that was up 19 per cent over the $460-million topline the company posted in the same period a year earlier.

Abernethy says that with EPS of $5.70, EBITDA of $145.9-million and the aforementioned $546-million in revenue, Constellation’s quarter bested his expectation on both the top and bottom line, but that outperformance was not enough to move his rating or price target.

In a research update to clients today, Abernethy maintained his “Hold” rating and one-year price target of $570.00 on Constellation Software, implying a return of -4.1 per cent at the time of publication. The analyst says the upward action in the stock is making it a little frothy.

“Based on our 2017 estimate, in our view CSU is trading at a relatively rich ~6x forward EV/Recurring revenue. In the last 12 months, CSU generated FCF of ~C$600M (excluding acquisition spending) and is now trading at ~21x EV/FCF (TTM),” he says, adding: “We believe Constellation has the opportunity to continue to drive material revenue growth and steadily scale its operations over the next five years. However, at current stock price levels we are maintaining our Hold rating.

Abernethy thinks Constellation will generate EBITDA of $539.8-million on revenue of $2.12-billion in fiscal 2016. He expects these numbers will improve to EBITDA of $611.2-million on a topline of $2.36-billion the following year.