Is Constellation Software still a buy? (November, 2024)

Following the company’s third quarter results, National Bank Financial analyst Richard Tse remains bullish on Constellation Software (Constellation Software Stock Quote, Chart, News, Analysts, Financials TSX:CSU).

On November 8, CSU reported its Q3, 2024 results. The company posted Net Income of $164-million on revenue of $2.54-billion, a topline that was up 20% year-over-year.

Tse says the results were in-line with his expectations, with EPS slightly below his estimates. He says the quarter was defined by a modest deployment of capital, but believes it is really nothing to worry about.

“Constellation deployed $267 mln on acquisitions in the quarter, which totals ~$1.2 bln of capital deployment as of the FQ3 quarter,” he wrote. “Subsequent to quarter end, Constellation has deployed $359 mln bringing the YTD total up to ~$1.5 bln which represents 67% of our (FY24) $2.3 bln (target) estimate required to maintain a +20% revenue / earnings growth rate. We think it’s important to highlight that while we track the capital deployment run rate, in recent years, the lowering of its hurdle rate has had Constellation taking on large transactions, such as Altera (in May 2022). Given that we don’t believe the run rate is fully representative of the potential pace of capital deployment on a forward-looking basis. Importantly, Constellation ended FQ3 with available liquidity of approx. $3.1 bln and a comfortable leverage ratio of 0.8x. All that, coupled with a (more) attractive valuation environment for acquisitions and an appetite for larger deals suggests continued deployment opportunities for the Company.”

In a research update to clients November 10, Tse maintained his “Outperform” rating and price target of $5,000 on CSE, implying a return of 14.8% at the time of publication.

The analyst thinks CSU will post EBITDA of $2.68-billion on revenue of $10.1-billion in fiscal 2024. He expects Adjusted EBITDA of $3.29-billion on a topline of $11.9-billion in fiscal 2025.

“Bottom line, the FQ3 results are consistent with our investment thesis: Constellation remains a solid acquisition growth compounder and given a healthy pipeline of 40K+ targets and attractive defensive attributes (strong FCF generation), we reiterate our Outperform rating,” Tse concluded.