Take a pass on Constellation Software, National Bank Financial says

Following the company’s second quarter results, National Bank Financial analyst Richard Tse is maintaining his neutral stance on Constellation Software (TSX:CSU).

On Thursday, CSU reported its Q2, 2018 results. The company earned $52-million on revenue of $752-million, a topline that was up 25 per cent over the $600-million the company posted in the same period last year.

Tse says this quarter fell below his expectations. One takeaway for the analyst was the decline in capital deployed, down 85 per cent sequentially and 35 per cent year-over-year.

“Bottom line, there was nothing in the results that would have us changing our view on this name; if anything, the bias would be to the negative given the lower than expected results where we were already calling for a decline in margins following recent acquisitions,” he says.

In a research update to clients today, Tse maintained his “Sector Perform” rating and one-year price target of (C) $1000 on Constellation Software, implying a return of negative five per cent at the time of publication.

Tse thinks CSU will generate EBITDA of (US) $750-million on revenue of $3.05-billion in fiscal 2018. He expects those numbers will improve to EBITDA of $871-million on a topline of $3.46-billion the following year.

“We think the stock is reasonably valued on our forward outlook,” the analyst adds. “That said, recent operating measures (like expanding the acquisition team) have the potential to increase in capital deployment – the reality is that potential is a necessity given the growing size of the revenue base.”