MENU

Buy This Serial Acquirer on Any Weakness

Constellation Software Inc. (TSX:CSU) is a tech company engaged in the acquisition, management, and building of vertical market software. The company has been a market darling and recently posted blowout earnings. On April 25, the company posted first quarter earnings of $8.50 per share, which was 17% above analysts’ estimates. The results propelled the company to new 52-week highs of $929. Constellation has returned 20% year to date and 47% over the past year, handily outperforming the market.

Serial acquirer

The company has a growth through acquisition strategy and is considered a “serial acquirer” by the industry. What’s a serial acquirer? There’s no hard and fast definition, but the prevailing view is that a serial acquirer is a company that acquires more than one company on average per year. In its own words, Constellation “seeks potential acquisition targets on an ongoing basis and may complete several acquisitions in any given fiscal year.”

According to research, serial acquirers provide investors with greater returns. A recent analysis by A.T. Kearney found that “frequent buyers increase value faster and Wall Street puts higher value on these buyers over infrequent buyers.” Further, their enterprise value growth rate is 25% higher than that of non-buyers. Constellation has an impressive track record, and management has proven itself fully capable of executing a growth through acquisition strategy.

Retail investor avoidance

One of the issues with the company is its extremely high share price. Trading above $900 per share, it often gets overlooked by retail investors. Unfortunately, investors are missing out, as a company’s share price should not influence decision making. Despite much evidence to the contrary, novice and retail investors still believe that companies with high share prices tend to be more expensive. The reality, however, is that share price means very little on its own.

There are clear psychological factors at play — factors that sometimes contribute to bad decisions by investors. At $300 per share, Constellation was considered expensive in 2014, but just look where we are today!

Outlook

The company has grown its earnings by the double digits over the past several years — a trend that’s expected to continue. Earnings are expected to grow by 28% in 2018 and 32% in 2019. Over the long term, I expect to see growth rates of between 16% and 20%. The company is certainly showing no signs of slowing down.

Buy on weakness

Even by its own standards, the company is currently trading at premium valuations. It is trading above its historical price-to-book, price-to-earnings, price-to-sales and price-to-cash flow ratios. Its current P/E ratio is 87.7, and it’s trading at 30 times book value, which is higher than industry averages. However, Constellation has historically traded significantly above industry averages and its performance has more than justified this premium valuation.

Looking forward, Constellation is trading at more respectable values. It has P/E to growth ratio (PEG) of 1.46 and its forward P/E is 29. Growth investors should add Constellation Software to their watch lists and buy on weakness.

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.