Investing in the equity markets can be quite tricky as you need to consistently identify long-term winners that have the potential to outpace the broader markets over time. It’s crucial to buy and hold companies that are part of expanding addressable markets, enabling them to grow earnings and revenue at a sustainable pace.
While it’s advisable to allocate a majority of your savings towards low-cost index funds to benefit from portfolio diversification, investors with a higher risk appetite can consider holding quality growth stocks that can deliver outsized gains.
One such TSX tech stock is Constellation Software (TSX:CSU), which has returned a staggering 1,530% to shareholders in the past 10 years. So, an investment of $10,000 in CSU stock would be worth more than $163,000 today. Comparatively, the TSX index has returned 116% in this period.
While past returns shouldn’t matter to current or future investors, the above example showcases the benefits of the power of compounding. Let’s see if CSU stock remains a good buy today.
What does Constellation Software do?
Founded in 1995, Constellation Software is valued at a market cap of $57 billion. It provides enterprise-facing software and services to clients across industries. The Canadian tech giant acquires, manages, and builds software businesses that develop mission-critical solutions to address specific customer needs, resulting in high switching costs and robust customer retention rates.
In the last 28 years, Constellation Software has grown at an enviable pace due to a combination of acquisitions and organic growth. Moreover, its large and diverse customer base allows it to generate cash flows across business cycles.
Constellation Software has six operational groups and serves customers in 100 different markets globally. Its acquisition-focused business model has allowed the company to increase sales from $3.5 billion in 2019 to $6.6 billion in 2022.
How did Constellation Software perform in Q2 2023?
Despite a sluggish macro environment, Constellation Software increased sales by 26% year over year to $2 billion. Comparatively, its net income surged by 18% to $103 million, or $4.88 per share.
It completed several acquisitions in Q2 for an aggregate cash consideration of $392 million. After accounting for deferred payments associated with the acquisitions, total considerations will amount to $506 million.
Constellation Software increased operating cash flows by 58% to $123 million, while free cash flow surged by 22% to $14 million in Q2 2023. Its robust earnings growth also allows the company to pay shareholders an annual dividend of $5.39 per share, indicating a forward yield of just 0.20%. However, these payouts have risen at an annual rate of 14% in the last 15 years, which is quite exceptional.
The Foolish takeaway
Priced at 34 times forward earnings, CSU stock might seem expensive. However, it is forecast to expand earnings by 40% annually in the next five years. Trading 6.5% below all-time highs, the tech stock is forecast to surge 15% in the next 12 months, given consensus price target estimates.
Constellation Software is a profitable company that continues to grow at a fast clip. It trades at a reasonable multiple and should be part of your equity growth portfolio in 2023.
