Constellation Software (Constellation Software Stock Quote, Chart TSX:CSU) has had a banner year so far in 2019 but as the stock climbs above $1200 mark, could there be any more upside to CSU?
Competition in the software space is heating up, says Barry Schwartz of Baskin Wealth Management, but it’s tough to bet against Constellation’s proven acquisition strategy.
“Two of my team went to the Constellation Software annual meeting and got a chance to listen to what management had to say and to see the elusive Mark Leonard,” says Schwartz, in conversation with BNN Bloomberg on Friday. “He built Constellation out of nowhere, out of an idea that I can invest in niche software and keep buying and keep buying and there’s no end to the amount of companies that I can acquire.”
“That’s what they do for a living. They don’t actually make anything, there’s no Research and Development. They just use the cash flow from companies that they acquire and keep on adding more,” he says.
Like the rest of the technology space, Constellation had a rough second half to 2018, but the stock has since come roaring back to life, having risen 37 per cent year-to-date. That progress is par for the course with CSU, which has been a market phenomenon over the years. In 2009, the stock was worth just $30, which means owners would be reaping 40 times their investment in just ten years.
Earlier this month, Constellation reported its first quarter earnings, coming in with revenue of $819 million, a 14-per-cent increase over Q1 of 2018, and Adjusted EBITA of $179 million, a 13-per-cent year-over-year increase. Adjusted EPS were $5.97 per share, which was lower than analysts’ forecasts. (All figures in US dollars.)
In the quarterly commentary, CSU management indicated that its pace of acquisitions was likely to slow down over 2019. At the same time, the company announced that its would be lowering the hurdle rate for acquisitions of at least $100 million, a move which it says will help the company become more price competitive on larger deals.
But Schwartz says that even with the slowdown, Constellation is likely to do well.
“There’s really no end to the companies that they can acquire. The only issue with Constellation is that the game is kind of up in that they’re not the only ones buying software companies. There’s lots of competition now,” Schwartz says. “And so Constellation has had to say, ‘We have to increase the prices we’re going to pay, which may hurt future returns, and we’re going to have to increase our balance sheet.’”
“We’ll see if that continues to happen, but I’m extremely bullish on Constellation. The stock has done incredibly well. It’s been an absolute no-brainer,” he says.