How High Can Constellation Software Fly?

The stock jumps again after another great quarter. But how long can the good times last?

| More on:
The Motley Fool

One year ago, Constellation Software (TSX:CSU) was trading for $120 per share, a huge win for its longer term shareholders. The company had gone public back in 2006 for $17 per share, and had grown steadily since then.

But the growth had mainly come through numerous small acquisitions (less than $10 million), and as the company got larger, it became more difficult to achieve the same level of growth. Making matters worse, the stock continued to trade at very high multiples, and seemed expensive.

The shareholders who held on are glad they did. After reporting fourth-quarter earnings on Friday, Constellation’s shares closed at $265, more than double their price a year ago. Fourth-quarter revenue was up 36% for the year, proving that the company is still able to achieve impressive growth.

Of course shareholders are asking the same question that they were a year ago. Are the shares now too expensive? Can the growth continue? A closer look at the last year provides some clues.

The shares are more expensive

In 2013, Constellation’s revenue per share increased by 36%, and cash flow per share increased by an even more impressive 52%. But the stock price more than doubled. The shares, which a year ago were trading at 17 times cash flow, now trade at 26 times cash flow.

Again, this growth came almost entirely from acquisitions. Excluding the acquisitions, growth was only 5%. And now that Constellation is a $5.6 billion company, this kind of growth will be much harder to come by.

But the story could go on

That said, these same questions were being asked about Constellation a year ago, and the company proved all its doubters wrong. Constellation has also proven it can make much larger acquisitions – at the end of last year, the company took out Total Specific Solutions (TSS) for $342 million. None of the numbers above include results from TSS.

Foolish bottom line

A previous article told a similar story about Valeant Pharmaceuticals (TSX:VRX)(NYSE:VRX), another high flier that has grown through acquisitions. But a comparison between the two companies would be very unfair to Constellation, which does not have the same accounting issues as Valeant.

It would be much more appropriate to compare Constellation to Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B), partly because the best time to buy the shares has likely already passed. But at the same time, both companies have a clean history, a fantastic track record, and great management. And with that formula, the sky is the limit.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair holds no positions in any of the stocks mentioned in this article.

More on Investing

data analytics, chart and graph icons with female hands typing on laptop in background
Investing

1 Strong Momentum Stock to Buy on the Current Dip

Waste Connections (TSX:WCN) stock is holding its own and is worthy of buying on any small (or large) dips.

Read more »

A Canada Pension Plan Statement of Contributions with a 100 dollar banknote and dollar coins.
Retirement

Retirees: What Is the CPP Enhancement and How Does it Work?

The CPP enhancement will increase your pension payout in retirement. But you still need other income sources to supplement the…

Read more »

Nuclear power station cooling tower
Energy Stocks

Should Investors Buy the Dip in Cameco Stock?

Cameco (TSX:CCO) stock recently experienced a slight dip, and with earnings around the corner, it might be time to pick…

Read more »

Path to retirement
Retirement

Invest in These TFSA Stocks to Sail Into a Serene Retirement

Is your TFSA set for safety or growth? Having these solid TFSA stocks provides a blend of both.

Read more »

A close up image of Canadian $20 Dollar bills
Investing

3 No-Brainer Stocks to Buy With $200 Right Now

The criteria for no-brainer stock varies among investors. For conservative investors, the list is usually small and rigid. In contrast,…

Read more »

The TFSA is a powerful savings vehicle for Canadians who are saving for retirement.
Dividend Stocks

TFSA Passive Income: 4 Stocks to Buy and Never Sell

These four TSX dividend stocks could boost your passive income.

Read more »

Family relationship with bond and care
Dividend Stocks

Invest in These TSX Stocks Now and Retire With Peace of Mind

Canadian stocks like Brookfield Asset Management (TSX:BAM) offer long term investment potential.

Read more »

growing plant shoots on stacked coins
Dividend Stocks

2 Risky Dividend Stocks to Avoid (and 2 Safe Ones)

Looking for dividend income? Here are two stocks to avoid and two stocks to readily buy for safe and steady…

Read more »