Is Constellation Software Inc. a Buy After its Strong Q3 Report?

Constellation Software Inc. (TSX:CSU) released third-quarter earnings on October 28, and its stock has reacted by making a slight move to the upside. Should you buy now?

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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 third-quarter earnings results after the market closed on October 28, and its stock has responded by making a slight move to the upside. Let’s break down the quarterly results to determine if the stock could continue higher from here and if we should consider initiating long-term positions today.

Acquisitions lead to very strong top- and bottom-line growth

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

Metric Q3 2015 Actual Q3 2015 Expected Q3 2014 Actual
Adjusted Earnings Per Share $4.67 $4.22 $3.27
Revenue $460.36 million $467.40 million $418.81 million

Source: Financial Times

Constellation’s adjusted earnings per share increased 42.8% and its revenue increased 9.9% compared with the third quarter of fiscal 2014. These very strong results can be attributed entirely to the company’s acquisition activity over the last year, which contributed $63 million in revenue in the third quarter, including $40 million in its public sector segment, and $23 million in its private sector segment, and this more than offset its negative 5% organic growth.

It is also worth noting that the company was heavily impacted by changes in foreign exchange rates, which reduced its organic growth by 6%.

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

  1. Adjusted net income increased 42.7% to $98.9 million
  2. Revenue increased 7.3% to $316.4 million in its public sector segment
  3. Revenue increased 16.1% to $144 million in its private sector segment
  4. Maintenance and other recurring revenues increased 15.7% to $298.5 million
  5. Professional services revenues decreased 7.6% to $91.99 million
  6. Hardware and other revenues increased 11% to $36.57 million
  7. Licensing revenues increased 17.4% to $33.3 million
  8. Adjusted earnings before interest, taxes, and amortization (EBITA) increased 20.1% to $120.3 million
  9. Adjusted EBITA margin improved 220 basis points to 26.1%
  10. Net cash flows from operating activities increasing 4% to $105.1 million

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

Should you buy shares of Constellation Software today?

The third quarter was a great success for Constellation Software, so I think its stock has responded correctly by moving higher.

I also think it represents a very attractive long-term investment opportunity today, because its stock still trades at inexpensive valuations, including just 34.8 times fiscal 2015’s estimated earnings per share of $16.04 and only 28.9 times fiscal 2016’s estimated earnings per share of $19.27, both of which are inexpensive compared with its trailing 12-month price-to-earnings multiple of 73.4 and its five-year average multiple of 40.7.

With its average price-to-earnings multiples and the 19.4% long-term growth rate in mind, I think Constellation’s stock could consistently command a fair multiple of at least 40, which would place its shares upwards of $770 by the conclusion of fiscal 2016, representing upside of more than 38% from current levels.

With all of the information provided above in mind, I think Foolish investors should strongly consider beginning to scale in to long-term positions in Constellation Software today.

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 Joseph Solitro has no position in any stocks mentioned.

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