Constellation Software wins price target raise at National Bank

Following the company’s fourth quarter results, National Bank Financial analyst Richard Tse has raised his price target on Constellation Software (Constellation Software Stock Quote, Chart, News, Analysts, Financials TSX:CSU).

On March 7, CSU reported its Q4 and fiscal 2024 results. In the fourth quarter, the company posted Adjusted EPS of $24.93 on revenue of $2.7-billion, up 16%, year-over-year.

Tse gave his take on the quarterly results.

“Constellation reported solid, in-line FQ4 results relative to expectations with revenue of $2.7 bln, +16% Y/Y (NBF and Cons.: $2.7 bln) and Adj. EPS of $24.93 (NBF: $22.10, Cons.: $22.98),” he wrote. “That said, we’d note thebulk of Adj. EPS upside came from FX tailwinds associated with certain nonUSD liability revaluations. With respect to the key KPI of capital deployment, Constellation deployed $620 mln (+34% Y/Y) in the quarter (inclusive of acquired cash and deferred payments) bringing the year’s total capital deployed to ~$1.8 bln (-31% Y/Y), representing 78% of our $2.3 bln FY24 estimate. Despite the shortfall in capital deployment in FY24 relative to our expectations, a potentially increasing attractive valuation environment under macro volatility should broaden out Constellation’s opportunities for its ~$3.1 bln in liquidity and low leverage. We’d note those larger opportunities like Optimal Blue (~$700 mln) tend to be more organic in their development, which means their timelines are not predictable from a trendline perspective. Additionally, we continue to believe Constellation will pursue more spinoffs as a way of driving incremental value creation for investors given the success of Topicus and Lumine, which have collectively driven C$6.7 bln in incremental market value to Constellation.”

In a research update to clients March 9, Tse maintained his “Outperform” rating on CSU but raised his price target on the stock from $5000 to $5500, implying a return of 11.2% at the time of publication.

The analyst thinks the company will post EBITDA of $3.22-billion on revenue of $11.9-billion. In fiscal 2026, Tse thinks CSU will post EBITDA of $3.8-billion on revenue of $13.8-billion.

“Bottom line,” Tse added, “the FQ4 results continue to support our 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 and increase our price target to C$5,500 (was C$5,000), as we roll our DCF forward one year and make modest tweaks to our assumptions. Our DCF-based price target implies a 25.9x EV/EBITDA multiple on our revised FY25 estimates (was 22.8x).”