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Constellation Software is not yet a buy, Kim Bolton says


Constellation Software
Kim Bolton
The bargains are everywhere in tech these days but not so much with Canadian growth-by-acquisition story Constellation Software (Constellation Software Stock Quote, Chart, News TSX:CSU), according to Kim Bolton, president and portfolio manager at Black Swan Dexteritas, who says the way forward is a little unclear for the company.

“We don't own Constellation here. In our stock portfolio we have entry points and we usually develop them in third, a third, a third as the market comes down and then we have price targets and we also manage toward those price targets,” said Bolton, in conversation with BNN Bloomberg on Tuesday.

“Constellation Software has been very, very good to us, and we took profit on it, it was probably the end of November, beginning of December,” he said. “It’ll be interesting to see how they actually maneuver through the next couple of months.”

In contrast to a lot of tech names that got knocked down 30, 40 and even 50 per cent in recent weeks, Constellation’s losses have been relatively minor. At it worst, the stock lost about 26 per cent between February 21 and March 23 when the markets were at their worst (so far, at least), whereas Canadian comparables such as Open Text, CGI Group and Shopify which lost 31 per cent, 33 per cent and 31 per cent, respectively, over the same time period.


Part of the story may relate to Constellation’s business, which is weighted towards government contracts and thus may see less of a dropoff during the currently challenging economic environment.

There were indications over the past year that Constellation’s M&A activity might be slowed by a tighter market. In an earnings report last May, the company lowered its hurdle rate to be more price competitive on its purchases while management indicated that the pace of acquisitions over the year would decrease.

The market reacted poorly to CSU’s latest quarterly report, its Q4 delivered on February 13, which showed revenue up 15 per cent but also featured a three per cent drop in organic growth.

For the 2019 year, revenue grew by 14 per cent with negative one per cent organic growth, while total acquisitions for 2019 came in at $549 million compared to acquisitions totaling $523 million in 2018.
But Bolton says that Constellation’s M&A activity could very well pick up this year as companies continue to struggle during the COVID-19 crisis, making them more ripe for acquisition.

“Constellation’s investment thesis is by buying and acquiring very lucrative runway type companies but at a discount, and certainly you have a number of those companies that are trading at a discount that I'm sure Constellation is looking for,” Bolton said.

“I wouldn't be surprised to see Constellation working very hard from home and actually assessing which companies they're going to be interested in. So, it may be an interesting play but I think it's a bit early right now,” he said.

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About The Author /

Jayson is a writer, researcher and educator with a PhD in political philosophy from the University of Ottawa. His interests range from bioethics and innovations in the health sciences to governance, social justice and the history of ideas.
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