One of Canada’s largest companies, Constellation Software (TSX: CSU) announced its first-quarter results yesterday. Let’s see how the tech heavyweight performed in Q1 and if it should be part of your equity portfolio in 2022.
Constellation Software reported revenue of $1.43 billion in the quarter ended in March, an increase of 22% year over year. The growth in sales was attributed to acquisitions, as organic growth ranged around 1%, compared to the year-ago period.
Its net income stood at $98 million, or $4.63 per share, compared to a loss of $9 million, or $0.41 per share, in the year-ago period. Constellation Software completed several acquisitions for a cash consideration of $214 million in Q1. Further, deferred payments associated with the acquisitions stood at $59 million, resulting in total consideration of $273 million.
The company’s operating cash flow rose 1% to $498 million, while free cash flow increased by $55 million year over year to $324 million. Its total expenses for Q1 stood at $1.09 billion, rising 27% year over year and accounting for 76% of total sales.
Constellation’s net cash position increased by $82 million to $334 million in Q1 due to an increase in operating cash flow, which exceeded the capital deployed on acquisitions and dividends. Its cash position rose by $233 million to $996 million compared to $763 million at the end of 2021, while its debt balance rose to $662 million from $511 million in this period.
We can see that Constellation Software has enough liquidity to continue its acquisition strategy going forward.
What’s next for CSU stock and investors?
Valued at $42.8 billion by market cap, Constellation Software has generated massive wealth for long-term investors. In the last 10 years, CSU stock has increased 2,750% to investors, easily crushing the broader market returns.
Constellation Software builds, manages, and acquires vertical market software businesses that provide mission-critical solutions to enterprises. It acquires companies that are profitable with significant growth potential, which allows Constellation to generate significant cash flow and revenue.
Constellation Software derives revenue from software licence fees, maintenance, and other recurring fees, as well as professional service fees and hardware sales. In Q1, maintenance and recurring revenue stood at $1.04 billion, accounting for the majority of sales.
This business segment consists of fees charged for customer support on the delivery of software products as well as recurring fees derived from subscriptions, software/support contracts, transaction-related revenue, hosted products, and software-as-a-service.
In the last few quarters, the maintenance and recurring revenue business was the only segment for Constellation Software that experienced consistent organic growth. Most of the other businesses have been wrestling with negative organic growth year over year, which might be a cause of concern for investors.
Is Constellation Software stock overvalued?
Analysts tracking the company expect sales to increase by 21.2% to $7.8 billion in 2022 and by 16.7% to $9.1 billion in 2023. Its adjusted earnings per share is forecast to rise from $57 in 2021 to $81.3 in 2023. So, CSU stock is valued at a forward price-to-2022 sales multiple of 5.5 and a price-to-earnings ratio of 29.5, which might seem expensive.
However, growth stocks command a higher valuation. Bay Street remains optimistic about CSU stock and forecasts a 12-month average price target of $2,662, which is 31% above its current trading price.
