Constellation Software has delivered a 36,000% return since its IPO. Is it still a buy?

Constellation Software (Constellation Software Stock Quote, Chart, News, Analysts, Financials TSXV:CSU) may be one of the TSX’s more opaque names, but its performance is anything but unclear, said Brian Madden, chief investment officer at First Avenue Investment Counsel, during a segment on BNN Bloomberg highlighting his top stock picks.

Madden called the company a “massive compounder,” noting it has delivered a total shareholder return of 36,000% since its 2006 IPO by acquiring hundreds of niche software firms and letting them operate with autonomy.

“The magic here is that this is sort of like a software-focused private equity fund, but in a listed public company format,” Madden said. “Essentially, what they do is they acquire mission-critical vertical market software companies … usually small tuck-in acquisitions of founder-led mom and pop vertical market software companies.”

Horizontal market software refers to applications used across various industries and niches, such as programs like Excel, PowerPoint, or Outlook, which have broad applicability. Vertical market software is more specialized and designed for specific sectors, such as veterinary clinics, daycare centers, or golf courses, where it serves as essential operational infrastructure.

Madden said Constellation typically retains the existing management team, providing them with operating efficiencies and procurement scale while allowing them the autonomy to make decentralized decisions and grow the business.

“And they do hundreds of acquisitions every year, and they keep finding more because it’s a very fragmented industry, and they’ve managed, despite operating in industries that most would acknowledge are sluggish, sort of low single-digit organic growth niches to compound their earnings per share growth at a 24% pace over the last decade.”

He said the stock is richly valued, trading at about 40 times earnings. But with a 24% historical and likely ongoing earnings growth rate, he sees a potent mix of value and growth backed by a track record that’s hard to dispute.

-30-