Industrial Alliance raises target on Constellation Software, maintains “Hold” rating

Its fourth quarter results were better than expected, but Industrial Alliance Securities analyst Blair Abernethy still thinks Constellation Software (Constellation Software Stock Quote, Chart, News: TSX:CSU) is fully valued at current levels.

On Wednesday, Constellation reported its Q4 and fiscal 2016 results. In the fourth quarter, the company earned $122-million on revenue of $564-million, a topline that bested last year’s figure of $512-million.

Abernethy says Constellation’s revenue just missed his estimate of $567.6-million and the street consensus of $569.9-million. But he says the company outperformed in terms of profitability. He notes that the company’s Q4 EBITDA number of $158-million with margins of 28.1 per cent bested his expectation of EBITDA of $147.5-million, with margins of 26.0 per cent. These higher margins, he notes drove EPS to $5.75, above his estimate of $5.38 and the street consensus of $5.52.

In a research update to clients Thursday, Abernethy maintained his “Hold” rating, but raised his one-year price target on the stock from $600 to $615, implying a return of 2.1 per cent at the time of publication. Despite the target change, the analyst says he can’t recommend investors buy the stock as these levels.

“We believe Constellation still has the opportunity 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,” he says.

Abernethy thinks Constellation Software will generate EBITDA of $624.6-million on revenue of $2.36-billion in fiscal 2017. He expects these numbers will improve to EBITDA of $717.4-billion on a topline of $2.65-billion the following year.