Constellation Software (TSX:CSU) and Berkshire Hathaway (NYSE:BRK.B) don’t appear to have much in common on the surface. One is a technology company; the other is largely an insurance company. One is fairly small by global standards; the other is a trillion-dollar behemoth. One invests in small startups; the other invests in large established companies. So, taking a surface-level view of things, these companies are worlds apart.
But look beneath the surface, and you’ll see that Constellation Software and Berkshire Hathaway have more in common than meets the eye. Constellation’s chief executive officer, Mark Leonard, has been called “Canada’s Warren Buffett.” Many people have been called that, but in Leonard’s case, the comparison is fairly apt. Leonard buys and holds companies long term, writes a popular shareholder’s letter, and is not afraid of thinking outside the box. These qualities of Mark Leonard influence the way Constellation is run and combine to make Constellation Software something of a more tech-oriented Canadian Berkshire Hathaway.
An interesting question, therefore, is whether Constellation Software could become the next Berkshire Hathaway. The company’s compounding track record would certainly cause it to become a Berkshire-tier giant eventually, but will the track record continue? That’s a matter I’ll explore in the coming paragraphs.
Mark Leonard’s capital-allocation style
Mark Leonard’s investing style is the most obvious thing that Constellation Software has going for it that could lead to it reaching a Berkshire-like scale. Mark Leonard is a buy-and-hold investor who generally tries to buy profitable companies for sensible prices rather than gambling on “ideas.” This fact alone makes it quite likely that Constellation will perform better than a typical venture capital fund that invests in the same types of companies Constellation does. Also, the kinds of numbers Mark Leonard has put up — 15% to 20% compound annual growth rate over the last decade — are similar to those of Berkshire in its early days. So, there is some possibility that Constellation Software will one day become a Berkshire-tier giant.
Profitability
Another factor that Constellation has going for it is profitability. The company is generally quite profitable, with a 35% gross profit margin, a 7% net income margin, a 15.6% free cash flow margin and a 32.5% return on equity (ROE). The margins here are not as high as those of the big tech giants, but the ROE is quite excellent.
Growth
A final factor that CSU has going for it is high growth. Over the last three years it compounded its revenue at 27% and its earnings at 22.85% per year. The company’s asset value per share has risen by 23% per year over the last 10 years. These figures are not unlike those of a younger version of Berkshire Hathaway, so perhaps Mark Leonard has a shot at making his company into the Berkshire Hathaway of tech.
Foolish takeaway
If present trends continue, then Constellation Software could become the next Berkshire Hathaway. I’m not saying this outcome is likely; it requires another several decades of very rapid compounding, which is a statistically unlikely result. But CSU could certainly continue outperforming the market for years to come.
