Constellation Software Analysis – December 2024

Constellation Software Inc (TSX: CSU), together with its subsidiaries, acquires, builds, and manages vertical market software businesses in Canada, the United States, Europe, and internationally. It provides mission critical software solutions for public and private sector markets. The company is also involved in the software licensing; and sale of third-party hardware.

Constellation is a serial acquirer. CSU typically acquires target companies with relatively decent revenues (its minimum on its website is $5m) at low revenue multiples. It likes companies with critical Software-as-a-Service (SaaS) solutions that aren’t projecting huge growth and don’t have enormous valuations. But every once in a while, it splurges sometimes on what it calls ‘exceptional companies’. Constellation has some debt but mainly uses free cash flow to finance acquisitions.

Market Cap: $96b CAD
Forward P/E: 33.56 (in line with historical rates)
Historical revenue growth average (2020-TTM2024): roughly 25% CAGR
Historical EPS growth (2020-TTM2024): roughly 8% CAGR

Criteria for good businesses:
-Number 1 or Number 2 market-share holder in a niche vertical market
-Revenues of at least $5-million
-Hundreds or thousands (not dozens) of customers
-Unimposing competitors
-An offering price that has been determined

Criteria for exceptional businesses:
-A mid- to large-sized vertical market software company (a minimum of $1-million earnings before interest and tax)
-Consistent earnings and growth — generally EBITDA/revenue + revenue growth of 20 percent or more per year
-Experienced and committed management
-An offering price that has been determined

Fast growth from acquisitions as well as organic growth is expected to be 25% next year. Constellation Software acquires great companies with wide moats and at good prices. Its strategy has been working ever since it became public in 1995. And its success could very well continue into the future.

*Disclosure*
I own and recommend shares of Constellation Software