Constellation Software’s growth plan is failing, Michael Sprung says

Has Constellation Software’s (Constellation Software Stock Quote, Chart, News: TSX:CSU) magic run come to an end?

One of the shining stars of the Canadian tech sector over the past decade, the company’s growth-by-acquisition formula appears to be wearing around the edges, says investment manager Michael Sprung, who doesn’t see enough organic growth from the company.

Toronto-based Constellation Software has made a name for itself in acquiring tech startups (they currently own over 250) at early stages and holding onto them while they mature into money-making enterprises.

That approach has been successful, for the most part, says Sprung, President of Sprung Investment Management, but the company’s core business doesn’t deserve its current valuation.

“It has by and large been a growth by acquisition story. They have done exceedingly well at it and that’s been reflected in the stock price,” Sprung told BNN yesterday.

“It’s one of these stocks that, as a value investor, I look at the multiple they put on Constellation Software, and to me, it’s valued at a continuation of a very, very high rate of growth. It could be vulnerable to a setback should that [growth] not continue to increase going forward.”

From 2010 onwards, Constellation’s share price has shot up from $36.00 to a high reached on March 21 of $915.00. Since then, the stock has dropped to the mid-$880.00 range, dipping down into the $940.00 range last week. The company plans on releasing its first quarter of 2018 financial results on April 25.

Constellation is facing increasing pressure from private equity competitors who are reportedly outbidding the company on takeover targets as of late.

“On the other side of it, organic growth has not been as high as what people were expecting,” says Sprung, “and I think that one thing that could be a catalyst to see [the stock price] move up would be better numbers on the organic growth side, aside from the acquisition part of it.”

“[Growth by acquisition] really depends on companies being able to finance that growth through borrowing, whether that’s debt or equity. Eventually, that often comes to an end,” he says.