Take a pass on Constellation Software, Industrial Alliance says

A quarter of “mixed” results isn’t shaking Industrial Alliance Securities analyst Blair Abernethy’s view that Constellation Software (Constellation Software Stock Quote, Chart, News: TSX:CSU) is fully valued.

On Thursday, Constellation Software reported its Q3, 2017 results. The company earned $54.26-million on revenue of $637.0-million, a 17 per cent topline bump over the $546.0-million it posted in last year’s third quarter.

Abernethy notes that the numbers came in below his estimates of $173.0-million in EBITDA, but the company’s revenue number topped his expectation of $626.0-million.

In a research update to clients today, Abernethy maintained his “Hold” rating and one-year price target of $680.00 on Constellation Software, implying a return of -8.1 per cent at the time of publication. The analyst explained his reasoning.

“Post Q3, we are marginally increasing our revenue estimates, decreasing our EBITDA estimates, and increasing our tax assumptions,” he said. “We are rolling our valuation forward to 2019E and our C$680 target price remains unchanged based on a blended approach, which includes P/E multiples, EV/FCF, EV/Recurring Maintenance revenue, and our DCF. In our view, CSU continues to trade at a relatively rich ~7.5x forward EV/Recurring revenue on 2018E. 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.”

Abernethy thinks Constellation will generate EBITDA of $641.1-million on revenue of $2.46-billion in fiscal 2017. He expects those numbers will improve to EBITDA of $731.9-million on a topline of $2.80-billion the following year.