Why I’d Buy Constellation Software Stock Even at Today’s Prices

CSU stock sure does look expensive, I get it. But there’s a good reason behind the price of this company that’s far from slowing its growth.

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Constellation Software (TSX:CSU) has seen tremendous growth on the TSX, with its stock price increasing by nearly 50% over the last year alone. Despite its impressive rise, CSU remains valuable to Canadian investors due to its consistent financial performance and acquisition strategy. With a market cap of $88.7 billion and a forward price/earnings (P/E) ratio of 31.4, CSU offers both stability and growth potential. Its ability to consistently generate strong cash flow and disciplined approach to acquisitions make it a long-term winner, even after such significant growth. So let’s look at why.

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Strong team only getting stronger

The management team behind CSU is a key reason for its sustained success. Founded by Mark Leonard, the company is known for its long-term strategy of acquiring and nurturing software companies in niche markets. Leonard’s hands-off approach allows acquired companies to continue operating with autonomy. And this has been instrumental in their success. The leadership team’s disciplined focus on value-driven acquisitions ensures that CSU continues to grow steadily, thereby avoiding risky over-expansion while maintaining a clear vision for the future. This approach has earned the company a reputation for smart, sustainable growth.

This strength has been seen through earnings momentum, where CSU continues to impress. For Q2 2024, revenue grew by 21%, driven by both organic growth (2%) and acquisitions. Net income soared 71% year-over-year to $177 million, reflecting the company’s ability to integrate new businesses and expand its revenue streams. Cash flow from operations also surged by 116%, a testament to CSU’s operational efficiency. As the company highlighted in its quarterly report, “Our strong performance continues to be fuelled by disciplined acquisitions and solid execution across our portfolio of companies.” This earnings growth solidifies CSU’s place as a reliable performer for investors.

Comparably valuable

Despite its high valuation metrics, CSU remains valuable for a few key reasons. Its trailing P/E of 101.1 might seem steep, but the company’s forward P/E of 31.4 reflects expectations of continued growth. With a 7.1 price-to-sales ratio and a 35.1 enterprise value to earnings before interest, taxes, depreciation and amortization (EBITDA), CSU is priced for its strong profitability and operational efficiency. Moreover, the company’s balance sheet is solid, with $1.9 billion in cash and strong cash flow generation. The combination of growth, profitability, and a disciplined acquisition strategy makes CSU a valuable investment, even at its current high valuation.

What’s more, the company’s low dividend yield (0.13%) might not appeal to income investors. Yet it reflects CSU’s focus on reinvesting profits into growth. Its payout ratio of just over 13% signals that most earnings are being used to fuel future expansion. With a return on equity of 15.9% and quarterly revenue growth of 21.1%, CSU continues to be an attractive option for investors seeking long-term growth over immediate income.

Bottom line

In short, CSU has had an impressive run on the TSX, but it’s far from losing its shine. With smart management, strong earnings growth, and a disciplined acquisition strategy, the software stock remains a valuable pick for long-term investors, even with its high valuation. If you’re looking for a company that continues to innovate and grow, CSU is definitely one to keep in your portfolio!

Should you invest $1,000 in Constellation Software right now?

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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 Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool recommends Constellation Software. The Motley Fool has a disclosure policy.

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