Even with its share price pullback and strong top and bottom line growth, Constellation Software (Constellation Software Stock Quote, Chart TSX:CSU) is still a pricey stock, says Blair Abernethy of Industrial Alliance Securities, who ahead of the company’s fiscal fourth quarter financials reiterates his “Hold” recommendation.
Constellation had an up and down year in 2018, first ratcheting up its momentum over the first half and then tumbling on revenue and earnings misses over its second quarter delivered in late July. From there, the stock lost a few more points over the latter half of the year, finishing 2018 up 12.8 per cent.
For its Q4, due on February 13, Abernethy is expecting CSU to report revenue of $781.3 million, up 13.6 per cent year-over-year (the consensus forecast is $800.9 million), while for Adj. EPS, he is expecting $7.43 per share, up 12.0 per cent year-over-year (consensus is $7.58 per share). (All figures in US dollars unless noted otherwise.)
“We expect Constellation to continue to drive material revenue growth and steadily scale its operations over the next few years. We expect the pace of small deal acquisitions to remain strong next year, particularly in a weaker macro environment,” said Abernethy in a quarterly preview last Friday.
Abernethy says CSU finished its previous quarter with cash of about $456 million and is now generating quarterly cash flow of about $150 to $250 million, leaving it ample liquidity to continue scaling up with its program of small tuck-in acquisitions.
“While our rating remains a Hold, we do see some potential positive catalysts for the stock, including improved operating margins driven by scale, incrementally faster organic revenue, and larger transformative acquisitions,” he says.
“In our view, CSU continues to trade at a relatively rich ~7.2x EV/Recurring revenue on 2018,” he says. “We remain confident that Constellation has the capability and opportunity to continue to drive plus-10-per-cent revenue and EBITDA growth over the next few years.”
Abernethy’s “Hold” rating comes with an unchanged target price of C$900.00, representing a projected 12-month return of negative 1.8 per cent at the time of publication.