Constellation Software stock rated Outperform by National Bank

National Bank Financial analyst Richard Tse says the stage is setting up for a solid 2023 for Canadian software name Constellation Software (Constellation Software Stock Quote, Charts, News, Analysts, Financials TSX:CSU). Tse reviewed the latest quarterly results in a Thursday update to clients where he reiterated an “Outperform” rating on CSU and 12-month target price of C$2,750.

Toronto-based Constellation, which acquires, manages and builds vertical market software solutions, released on Wednesday its fourth quarter and full 2022 financials. The company came in with revenue up 34 per cent (with negative one per cent organic growth) to $1,847 million and net income attributable to common shareholders up 23 per cent to $152 million or $7.19 on a diluted per share basis. (All figures in US dollars except where noted otherwise.)

The company said it completed acquisitions over the quarter for an aggregate cash value of $211 million, while cash flows from operations were up 17 per cent to $400 million.

Over the full 2022 year, revenue was up 30 per cent to $6,622 million, with a negative one per cent organic growth rate, and net income was up 65 per cent to $512 million or $24.18 per share.

Last month, Constellation announced a special dividend by spin-out, where CSU shareholders received roughly three subordinate voting shares of newly-public entity Lumine Group for each Constellation share, resulting in about 63.6 million Lumine Group shares.

Looking at the quarterly results, Tse called them in-line with estimates, where the $1,847 million in revenue compared to Tse’s estimate at $1,784 million and the consensus estimate at $1,800. Adjusted EPS at $13.17 per share compared to Tse’s call at $14.00 and the Street at $0.22 per share.

On Constellation’s capital deployment over the quarter, Tse said the $277 million, while down 51.0 per cent from a year earlier but up 3.4 per cent sequentially, was solid, particularly given that the company was in the middle of acquiring WideOrbit, a deal completed on February 22, and spinning off Lumine. 

Tse also noted that on a constant currency basis, the Q4 marked CSU’s eight in a row of positive organic growth at four per cent year-over-year, which he called impressive considering CSU’s highly diversified businesses and limited revenue synergies.

“All-in, we believe increasingly attractive valuations coupled with consistent positive organic growth (in CC) is setting the stage for a solid FY’2023 while a recurring cash flow base (FCF Yield 4.9 per cent) provides investors with some strong defensive attributes under a volatile market backdrop,” Tse wrote.

Up ahead, Tse has forecasted 2023 revenue and EBITDA at $7,983.1 million and $2,089.5 million, respectively, and 2024 revenue and EBITDA at $9,076.2 million and $2,598.8 million, respectively. At the time of publication, Tse’s C$2,750 target represented a projected one-year return of 13.2 per cent.