Constellation Software is a rock star of a stock, this investor says

The share price for Constellation Software (Constellation Software Stock Quote, Chart TSX:CSU) jumped 14 per cent on Thursday as the Canadian tech company posted strong top and bottom line growth in its latest quarterly earnings. And although the stock is climbing back over the C$1,000.00 mark — a peak not seen since last summer — shareholders shouldn’t worry that it’s getting too expensive, according to Jason Mann of EdgeHill Partners, who argues that the fundamentals look good.

Constellation’s fourth quarter and full year ended December 31, 2018, arrived on Wednesday, with the company reporting revenue of $831 million, a 21 per cent year-over-year increase and including two per cent in organic growth, to go along with Adjusted EBITA of $226 million, a 29 per cent year-over-year increase. For the year, Constellation’s top line grew by 23 per cent while its net income increase 71 per cent, with cash flows from operations jumping 25 per cent to $662 million. (All figures in US dollars unless otherwise noted.)

With the financials, the company announced a $1.00 per share dividend as well as a $20.00 per share special dividend.

“Constellation invested $603 million in acquisitions during 2018 at rates of return that we believe will be attractive,” stated the company’s press release. “We are optimistic about our acquisition pace for 2019, but we feel that we have capital in excess of our needs and should return the excess to shareholders.”

It’s that confidence in its ability to keep growing that impresses Mann, chief investment officer at EdgeHill Partners.

“I would say that you really can’t count them out in terms of having more in the tank,” said Mann to BNN Bloomberg on Thursday. “The one worry about them is that because they’re generating growth by acquisition, eventually you run out of targets. They haven’t seemed to have hit that wall yet.”

“They really are quite amazing,” he says. “They are growth by acquisition; they do dozens and dozens of acquisitions around the world every year and yet they still manage to hit their numbers, have huge return on equity. It’s one of the best managed companies in terms of generating profitability for equity holders.”

CSU had been a steady climber for years before really taking off over the first half of 2018, rising 46 per cent between January 1 and mid-July. Like many names in the tech sector, the wheels came off over the back end of the year, however, where the stock lost 20 per cent between mid-July and year end.

“It’s still quite a reasonably priced company and you look at the long-term chart on it, it’s a rock star,” says Mann. “It’s trading at 21x EV/EBITDA, a bit expensive on price to earnings but it’s that return on equity that really shines. It’s got good price momentum, reasonable valuation. They don’t pay out a lot of yield; they use that cash for deals and that’s fine because they can convert it into earnings.”