Trending >

Don’t miss this opportunity on Constellation Software

Constellation Software

Portfolio manager Chris Blumas has one piece of advice for investors wondering whether now’s a good time to be wading into the Canadian tech space with a name like Constellation Software (Constellation Software Stock Quote, Charts, News, Analysts, Financials TSX:CSU): just buy it. 

“You don’t get an opportunity to buy this one very often. It’s very well known and it usually trades at a very high multiple,” said Blumas, portfolio manager at Raymond James Investment Counsel, who in a segment on BNN Bloomberg on Wednesday nominated Constellation Software as one of his three top picks for the 12 months ahead.

With the continuing dislike in the markets for tech and growth stocks, Constellation is one of a number of companies seeing their share price drop substantially this year. Unlike some, CSU survived the earlier days of the market’s rotation away from purportedly riskier ends of the investment spectrum, with the stock staying relatively flat between last November and April of this year. But the past half-year has been tough on Constellation, which is down about 18 per cent since mid-April and down about 22 per cent year-to-date. 

Operationally, Constellation appears to be running smoothly, growing its revenue by 30 per cent year-over-year in its most recent quarter, the company’s Q2, delivered in early August, with net income up 43 per cent to $126 million or $5.94 per diluted share. 

And as a serial acquirer of niche vertical software businesses, Constellation keeps growing its stable of companies, having spent about a billion dollars over the Q2 on acquisitions. That’s higher than its recent average — the company spent $1.5 billion on acquisitions in all of 2021, for example — but it likely in part reflects an attractive buyer’s market for companies with the available cash to scoop up businesses at a lower valuation during the currently challenging macroeconomic environment.

For Blumas, Constellation is attractive because its M&A model is more risk-averse than most growth-by-acquisition stories out there.

“Constellation is a software consolidator, and they have two big unique advantages that other companies don’t have. They have this infrastructure that allows them to do small acquisitions — and these acquisitions they do are typically $5 and $10 million software companies and they’ve done hundreds of acquisitions over the years,” he said. 

“[Secondly], on their capital allocation framework, it’s a cash flow compounder. There’s really nothing like this out there, because as they do acquisitions and by the law of large numbers, most companies have to target bigger deals, [but] Constellation has made a deliberate attempt to stay true to what they do and focus on inefficient markets. So, they’ve built out that infrastructure to keep doing small deals,” he said.

Blumas said Constellation also has the benefit of having grouped their businesses into separate units, each with its own M&A program, which cuts down on risk to the whole company. He compares Constellation to another Canadian software name, OpenText, an enterprise information management software company, which recently saw its share price plummet after announcing a multi-billion dollar acquisition, one which could handcuff the company’s growth prospects for a while.

“[Constellation] has been able to keep their growth going, which has been exceptional and it hasn’t slowed down in the company’s history, because they have six mini Constellations under the one umbrella,” Blumas said. “Constellation is a holding company for six independent companies, and these are where the acquisitions take place, and so, the acquisitions and the debt is placed at the operating company level, so it never puts any of the other silos of the holding company at risk. So, in terms of risk management it’s very, very high. And in terms of debt levels, they’re not excessive.”

“OpenText is more reliant on senior management to find deals and do deals whereas for Constellation more depends on its operating subsidiaries,” he said.

Blumas said with the pullback on CSU, the fundamentals are looking great right now, with its free cash flow yield at around four per cent while its price to cash flow is a little under 24x.

“It’s a little bit less of a bargain when compared to [some] other top picks, but I think relative to what it can do for you and the quality of the business, you don’t get a lot of chances to buy this one. I think this is a great opportunity,” he said.

We Hate Paywalls Too!

At Cantech Letter we prize independent journalism like you do. And we don't care for paywalls and popups and all that noise That's why we need your support. If you value getting your daily information from the experts, won't you help us? No donation is too small.

Make a one-time or recurring donation

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.
insta twitter facebook