Expensive stocks like Fairfax Financial Holdings (TSX:FFH) and Constellation Software (TSX:CSU) on the TSX may have high price tags, yet they can still be excellent buys. Strong long-term performance is especially key. Fairfax Financial, for instance, has seen its stock price rise over 40% year to date, and Constellation Software boasts a remarkable 10-year average annual return of about 35%. These stocks typically offer stable growth and solid management, making them attractive despite their upfront costs. In the long run, paying a premium often leads to premium returns! But which is the better buy?
CSU
Constellation Software (CSU) is a powerhouse in the tech world, known for acquiring and growing vertical market software companies. The company’s strength lies in its diversified portfolio of businesses. These cater to niche markets across various sectors. CSU’s business model focuses on acquiring smaller, mission-critical software firms and integrating them into its ecosystem, ensuring consistent cash flow and growth. This strategy has made it a long-standing favourite among investors looking for a stable, growth-oriented company on the TSX.
In its most recent earnings report for the second quarter (Q2) of 2024, CSU posted impressive numbers, with revenue growth of 21% year over year to $2.47 billion. Net income surged by 71% to $177 million, or $8.35 per share, showing that the company continues to thrive even as it expands through strategic acquisitions. The company’s free cash flow available to shareholders also grew dramatically, reaching $182 million. A sharp increase from the previous year’s $14 million. These results underscore CSU’s ability to scale profitably while keeping its operations lean.
Valuation-wise, Constellation Software might appear expensive with a price-to-earnings (P/E) ratio of 104.95. Yet its forward P/E of 32.47 suggests investors are pricing in strong future earnings growth. Given CSU’s consistent ability to grow revenues and profits, combined with its effective acquisition strategy, it continues to be a compelling buy for long-term investors despite the high price tag.
FFH
Fairfax Financial Holdings (FFH) is a diversified financial services holding company primarily focused on property and casualty insurance and reinsurance. Its business model emphasizes long-term value creation through strategic investments, such as its recent acquisition of controlling interest in Peak Achievement Athletics, the parent company of Bauer Hockey. This acquisition strengthens Fairfax’s position in the sports equipment sector. Thus showcasing its ability to diversify its portfolio and build on iconic brands, such as Bauer, which is synonymous with hockey worldwide.
Fairfax’s most recent earnings for Q2 2024 were impressive, with net earnings reaching $915.4 million, up from $734.4 million in Q2 2023. A large part of this growth was driven by a strong performance in its insurance operations, where adjusted operating income rose by 22.5% to $1.12 billion. The company also saw significant gains in its investment portfolio, with $241.6 million in net investment gains, primarily from equity positions. Fairfax continues to benefit from its underwriting profitability and disciplined investment strategy. This helped increase book value per share by 6% in the first half of 2024 to $979.63.
From a valuation perspective, Fairfax remains attractively priced despite its substantial growth. Its trailing P/E ratio is just 7.66, making it relatively undervalued compared to many peers. Additionally, Fairfax offers a forward annual dividend yield of 1.20%, making it appealing to income-focused investors. For those seeking a well-managed company with a diversified business model, growing earnings, and solid investment returns, Fairfax remains a compelling long-term buy.
Foolish takeaway
Both FFH and CSU offer compelling reasons to buy. Yet, it really depends on your investment style. Fairfax shines with its solid insurance operations, strong investment gains, and an attractive valuation with a P/E of just 7.66, making it a great option for value investors. However, Constellation Software continues to deliver impressive revenue growth and a strong acquisition strategy, though it comes with a higher price tag, reflected in its P/E of 104.95. If you’re looking for steady growth at a premium, CSU is your go-to. But for a bargain on a diversified, well-managed company, Fairfax might be the better pick.
