A workhorse of a company if there ever was one in the Canadian tech space, Constellation Software (Constellation Software Stock Quote, Charts, News, Analysts, Financials TSX:CSU) has powered ahead in 2021, breaking through the $2,200 mark twice now over the past couple of months and putting the stock up about 32 per cent for the year so far.
But those gains have put the stock into the pricey category, says Greg Newman, senior wealth advisor at Scotia Wealth Management, who spoke on BNN Bloomberg on Friday. Newman says Constellation’s spin-out of earlier this year, Topicus.com (Topicus.com Stock Quote, Charts, News, Analysts, Financials TSXV:TOI) might be the better bet right now.
“I like Constellation Software and it was a top pick of ours maybe but a year and a half ago. We own it and have done very well with it,” said Newman. “It’s not cheap anymore though. It’s trading at around 33x 2023 with a 14 per cent growth rate. So it’s about as expensive as Microsoft.”
Ahead of Constellation’s third quarter results due on November 4, the company posted year-over-year revenue growth of 35 per cent in its second quarter 2021, delivered in August. The topline of $1.249 billion was up from $922 million a year earlier, with 14 per cent organic growth and representing eight per cent growth after adjusting for changes in forex.
Q2 net income attributable to shareholders was up seven per cent from a year earlier to $88 million or $4.16 per diluted share. Cash flows from operations were $171 million, down 28 per cent from a year earlier. Constellation said it completed a number of acquisitions over the quarter for an aggregate price of $292 million while since the close of the quarter and up until the press release (August 5) CSU has either completed or entered into agreements to acquire businesses for $122 million.
On the dividend front, Constellation, a $46 billion market cap company, declared a $1.00 per share dividend payable on October 8, 2021, while its dividend yield currently sits at 0.23 per cent.
Earlier this year, Constellation shareholders were given a stake in Topicus, a European software conglomerate whose M.O. is similar to CSU’s. Constellation bought Dutch software company Total Specific Solutions (TSS) in 2013 for €240 million and then last year created Topicus out of that sub-unit and vertical market software company Topicus itself, bought last year. The aim was to create a publicly listing company out of the merged group, one which would operate in a way similar to Constellation, which gives its acquisitions a broad level of autonomy and identity rather than being swallowed up by the larger business.
On the merger with TSS, Topicus CEO Daan Dijkhuizen said in a press release, “We see TSS as the designated partner to realize our further growth ambitions in Europe. The intended collaboration contains a wealth of opportunity for our team members, customers and product offerings. Both Topicus and TSS have a strong culture of entrepreneurship and proven craftsmanship combined with great focus. The mutual complement lies in the bundling of knowledge of and experience in healthy business operations, effective and customer-oriented services in combination with innovative strength.”
That go-public move was completed in early January, 2021, where Constellation gave its shareholders by way of a dividend-in-kind approx. 1.86 shares of Topicus. So far, shareholders should be happy with the move as the stock has more than doubled, going from $66 to start in February to now $138.
Newman says he favours Topicus over Constellation right now.
“I like their Topicus a lot. It’s very hard to get coverage of it but, really, you can figure out the name a little bit by following CSU. And between the two I’d rather buy Topicus purely as a speculator because it’s a more speculative stock,” Newman said.
“CSU, I like it a lot but I wouldn’t be chasing it at these levels,” he said.
Topicus hit revenue of €178.2 million for its second quarter 2021, which represented a year-over-year growth rate of 54 per cent with eight per cent organic growth. Net income went from €14.1 million of €0.12 per diluted share a year earlier to €168.8 million or €0.11 per share.
Over the quarter, the company said it made acquisitions for aggregate cash consideration of €5.2 million while subsequent to the Q2’s end, Topicus completed or entered into agreements for a further €49.6 million.
“For the quarter ended June 30, 2021, cash from operations were negative €34.6 million compared to negative €8.3 million for the same period in 2020,” the company said in an August 5 press release. “Many of the businesses invoice customers for annual software maintenance fees in Q1 each year resulting in a disproportionate amount of cash being received in the first quarter as compared to the remaining three quarters. For the six months ended June 30, 2021, CFO increased €13.1 million to €125.2 million compared to €112.1 million for the same period in 2020 representing an increase of 12 per cent.”
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