Company ProfileÂ (excerpt from Reuters): Constellation Software Inc. is engaged in the development, installation and customization of software. The Company acquires, manages and builds vertical market software (VMS) businesses. The Company’s segments include public sector and private sector. The public sector segment develops and distributes software solutions primarily to government and government-related customers. Its public sector segment includes Volaris Operating Group, Harris Operating Group and Total Specific Solutions Operating Group. The private sector segment develops and distributes software solutions primarily to commercial customers. Its private sector segment includes Jonas Operating Group, Perseus Operating Group and Vela Operating Group. Its geographical segments include Canada, USA and UK/Europe. It serves various markets, such as communications, credit unions, drink distribution, tour operators, auto clubs, textiles and apparel, hospitality, notaries, home and community care, and long-term care.
Downloadable PDF version of this valuation:
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
|Defensive Investor; must pass 6 out of the following 7 tests.|
|1. Adequate Size of the Enterprise||Market Cap > $2Bil||$18,245,904,747||Pass|
|2. Sufficiently Strong Financial Condition||Current Ratio > 2||0.85||Fail|
|3. Earnings Stability||Positive EPS for 10 years prior||Fail|
|4. Dividend Record||Dividend Payments for 10 years prior||Pass|
|5. Earnings Growth||Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end||315.27%||Pass|
|6. Moderate PEmg Ratio||PEmg < 20||106.66||Fail|
|7. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||23.65||Fail|
|Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.|
|1. Sufficiently Strong Financial Condition||Current Ratio > 1.5||0.85||Fail|
|2. Sufficiently Strong Financial Condition||Debt to NCA < 1.1||-1.32||Fail|
|3. Earnings Stability||Positive EPS for 5 years prior||Fail|
|4. Dividend Record||Currently Pays Dividend||Pass|
|5. Earnings Growth||EPSmg greater than 5 years ago||Pass|
Stage 2: Determination of Intrinsic Value
|MG Growth Estimate||8.79%|
|MG Value based on 3% Growth||$117.05|
|MG Value based on 0% Growth||$68.61|
|Market Implied Growth Rate||49.08%|
|% of Intrinsic Value||409.13%|
Constellation Software Inc. does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings stability over the last ten years, and the high PEmg and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the current assets, and the lack of earnings stability over the last five years. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.
As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $5.09 in 2014 to an estimated $8.07 for 2018. This level of demonstrated earnings growth does not support the market’s implied estimate of 49.08% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.
At the time of valuation, further research into Constellation Software Inc. revealed the company was trading above its Graham Number of $0. The company pays a dividend of $5.11 per share, for a yield of 0.6% Its PEmg (price over earnings per share – ModernGraham) was 106.66, which was above the industry average of 49.59. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-41.65.
Constellation Software Inc. scores quite poorly in the ModernGraham grading system, with an overall grade of F.
Stage 3: Information for Further Research
|Net Current Asset Value (NCAV)||-$41.65|
|Number of Consecutive Years of Dividend Growth||0|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Balance Sheet Information||12/1/2017|
|Total Current Assets||$1,267,916,000|
|Total Current Liabilities||$1,496,796,000|
|Shares Outstanding (Diluted Average)||21,192,000|
Earnings Per Share History
|Next Fiscal Year Estimate|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$8.07|
Other ModernGraham posts about the company
Other ModernGraham posts about related companies
The author did not hold aÂ position in any company mentioned in this articleÂ at the time of publication and had no intention of changing that position within the next 72 hours. Â See my current holdings here. Â This article is not investment advice; any reader should speak to aÂ registeredÂ investment adviser prior to making any investment decisions. Â ModernGraham is not affiliated with the company in any manner. Â Please be sure to review our detailed disclaimer.