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Constellation Software is my Top Pick, Barry Schwartz says

Barry Schwartz

If there’s one thing investors are looking for in the current market climate is stability and while many tech and software names don’t fit on a list of take-it-to-the-bank winners, that’s definitely the case for Canadian success story Constellation Software (Constellation Software Stock Quote, Charts, News, Analysts, Financials TSX:CSU), according to portfolio manager Barry Schwartz who just nominated CSU as one of his top picks for the 12 months ahead.

“A theme of my top picks is great capital allocators and companies that are waiting to pounce on opportunities while others run into trouble, and Constellation Software has built a business of hundreds of small software companies — I think they now have over 700 — and the party keeps going there,” said Schwartz, chief investment officer at Baskin Wealth Management, who spoke on a BNN Bloomberg segment on Monday.

Toronto-based Constellation is a vertical market software provider, with products that don’t have broad appeal but have carved out a dominant position within a particular industry. Constellation’s modus operandi is to buy up these smaller providers by the handfuls per year and then use their cash from operations to acquire more businesses, and on it goes.

Schwartz says CSU’s strategy, which has now over two decades of proven history to lean on, can’t be beat, making Constellation a reliable investment in today’s volatile environment.

“They [continue] to reinvest all the free cash flow they generate, to continue to buy more [companies] under the tutelage of CEO Mark Leonard, and they’ve built an unbelievable powerhouse,” he said. “They just had their investor day recently and they just see more opportunities to grow all across the globe, and I think this is one of the best business models we’ve ever seen at Baskin Wealth.”

“It makes so much sense. The software companies that they own, you can’t run your businesses without them. It’s not like a Microsoft Excel — these are niche software providers, whether you own a gym or you run an architectural firm, they sell the software you need to run your business and you’re never going to change,” Schwartz said. 

“We’re very excited to continue to be long-term shareholders of Constellation Software,” he said.

Last week, Constellation released its first quarter 2022 earnings, reporting sales growth of 22 per cent year-over-year to $1.431 billion. Of that growth, one per cent was declared as organic, which was the same as for the Q1 2021. Net income came in at $98 million or $4.63 per diluted share compared to a net loss of $9 million or $0.41 per share a year earlier, while cash flows from operations were $498 million, up one per cent from a year ago.

As for CSU’s acquisitions over the quarter, the company said it made a number of purchases for aggregate consideration plus deferred payments of $273 million. That number compares to $448 million of acquisitions over the Q1 2021.

Constellation, with a $40-billion market cap and a tiny but consistent dividend yield of about 0.3 per cent, has seen its share price tumble over the past month, going from around $2,200 per share in mid-April to now just under $1,900. The stock was last at that level in July, 2021, while the 52-week high came in December at $2,368 and the low was $1,714 last May. The longer-term results for CSU are more impressive, as the stock has returned about 50 per cent since the start of 2020, about 165 per cent over the past five years and an incredible 2,045 per cent over the past ten years.

One of the more recent stories on Constellation Software was the move made early last year to hive off a European unit under the ( Stock Quote, Charts, News, Analysts, Financials TSX:TOI) banner to carry out the same Constellation play book on the other side of the pond. That stock put up huge gains over the first eight months of its existence as a public company but has given back a lot of that ground during the current market rotation away from tech and growth names which began last November. TOI is now up about 12 per cent since its inception last February.

Topicus’ first quarter 2022 numbers were also recently released, with the company growing its revenue by 13 per cent (three per cent organic) to €203.8 million and net income climbing to €20.4 million. Topicus made acquisitions over the quarter including deferred payments of €18.8 million and had cash flows from operations up ten per cent to €176.0 million. 

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