CSU stock is still undervalued, National Bank says

Following the company’s first quarter results, National Bank Financial analyst Richard Tse has maintained his “Outperform” rating on Constellation Software (Constellation Software Stock Quote, Chart, News, Analysts, Financials TSX:CSU).

On May 10, CSU reported its Q1, 2024 results. The company posted Net Income of $105-million on revenue of $2.35-billion, a topline that was up 23%, year-over-year.

The analyst summarized the quarterly results.

“Constellation reported essentially in-line FQ1 results relative to our (NBF) expectations,” he wrote. “With respect to the key growing driver, capital deployment (on acquisitions), Constellation deployed $288 mln in the quarter (inclusive of deferred payments), down 60% Y/Y given the challenging year-over-year comparable as WideOrbit closed on January 1, 2023. Excluding the outsized contribution from WideOrbit (US$490 mln) in the prior year, capital deployment in the quarter was up 26% Y/Y. We’d also note Constellation deployed an additional $553 mln subsequent to quarter end bringing the year-to-date total up to $841 mln. That represents 37% of our $2.3 bln F24 estimate required to achieve a +20% Y/Y revenue / earnings growth rate. In addition to the primary growth driver of acquisitions, Constellation reported its 13th consecutive quarter of positive organic growth (in constant currency – CC), up 3% Y/Y; which continues to be impressive given its highly diversified businesses with limited revenue synergies. Also important, Maintenance and Other Recurring revenue was up 7% Y/Y organically (+6% in CC) which suggests continued pricing power.”

In a research update to clients May 12, Tse maintained his “Outperform” rating and price target of $4300.00 on CSU, implying a return of 15.2% at the time of publication.

The analyst thinks the company will post EBITDA of $2.74-billion on revenue of $10.1-billion in fiscal 2024. He expects those numbers will improve to EBITDA of $3.38-billion on a topline of $12.0-billion in fiscal 2025.

“Bottom line, FQ1 results have Constellation tracking in line with our investment thesis,” Tse concluded. “That consistency is one reason why this is a stalwart name among our coverage group and why CSU remains a top pick.”