The Motley Fool

Should You Buy Constellation Software Inc. After the Recent Dip?

Constellation Software Inc. (TSX:CSU), one of leading providers of software and related services to a select group of public and private sector markets, announced weaker-than-expected second-quarter earnings results after the market closed on July 29, and its stock has responded by falling over 2.5% in the trading sessions since. Let’s take a closer look at the results to determine if we should consider using this weakness as a long-term buying opportunity, or if we should wait for an even better entry point in the trading sessions ahead.

Breaking down the weaker-than-expected results

Here’s a summary of Constellation’s second-quarter earnings results compared with what analysts had anticipated and its results in the same period a year ago. All figures are in U.S. dollars.

Metric Reported Expected Year-Ago
Adjusted Earnings Per Share $3.76 $3.98 $3.07
Revenue $443.51 million $450.46 million $415.93 million

Source: Financial Times

Constellation’s adjusted earnings per share increased 22.5% and its revenue increased 6.6% compared with the second quarter of fiscal 2014. The company noted that these very strong results could be attributed entirely to the acquisition activity over the last year, including 18 acquisitions in the public sector and 16 acquisitions in the private sector, which contributed $46 million in revenue in the second quarter and more than offset its negative 4% organic growth.

Here’s a quick breakdown of 10 other notable statistics from the report compared with the year-ago period:

  1. Revenue increased 5% to $308.3 million in its public sector segment
  2. Revenue increased 10.7% to $135.3 million in its private sector segment
  3. Maintenance and other recurring revenues increased 12.3% to $282.08 million
  4. Professional services revenues decreased 3% to $96.41 million
  5. Licensing revenues increased 8.8% to $33.03 million
  6. Hardware and other revenues decreased 8.7% to $31.99 million
  7. Adjusted earnings before interest, taxes, and amortization (EBITA) increased 22.1% to $99 million
  8. Adjusted EBITA margin expanded 280 basis points to 22.3%
  9. Net cash flows from operating activities increased 45.6% to $64.17 million
  10. Completed eight acquisitions for aggregate cash consideration of $112 million

Constellation also announced that it will be maintaining its quarterly dividend of $1.00 per share, and the next payment will come on October 5 to shareholders of record at the close of business on September 17.

Should you buy Constellation Software on the dip?

It was a great quarter overall for Constellation Software, regardless of what analysts had expected, so I do not think the post-earnings drop in its stock was warranted. With this being said, I think the drop represents a great long-term buying opportunity, especially because it now trades at even more attractive valuations, including 36.4 times fiscal 2015’s estimated earnings per share of $15.99 and just 29.8 times fiscal 2016’s estimated earnings per share of $19.49, both of which are inexpensive compared with its five-year average price-to-earnings multiple of 38.4 and the industry average multiple of 48.7.

With all of the information provided above in mind, I think Constellation Software represents one of the best long-term investment opportunities in the technology sector today. Foolish investors should strongly consider beginning to scale in to positions over the next couple of trading sessions.

Our TOP turnaround stock pick is a techie too...

When tech companies fall from grace like this Canadian icon did, it’s typically impossible to regain relevance. Here at Motley Fool Canada, we think this company and its CEO are prepared to prove all of the doubters wrong. We have even named it one TOP turnaround stock for 2015. Will you be left on the outside looking in should our intuition come to fruition?

If you’re a curious soul (like me), then you can download the name, ticker symbol, and price guidance absolutely FREE.

Simply click here to receive your Special FREE Report, “A Top Turnaround Stock Idea for 2015.”

Fool contributor Joseph Solitro has no position in any stocks mentioned.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.