Software Stocks

Constellation Software Inc Valuation – April 2018 $TSE-CSU

Company Profile (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.

CSU Chart

CSU data by YCharts

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of TSE-CSU – April 2018

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

 

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

EPSmg $8.07
MG Growth Estimate 8.79%
MG Value $210.45
Opinion Overvalued
MG Grade F
MG Value based on 3% Growth $117.05
MG Value based on 0% Growth $68.61
Market Implied Growth Rate 49.08%
Current Price $861.00
% 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
Graham Number $0.00
PEmg 106.66
Current Ratio 0.85
PB Ratio 23.65
Current Dividend $5.11
Dividend Yield 0.59%
Number of Consecutive Years of Dividend Growth 0

 

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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
Long-Term Debt $301,956,000
Total Assets $2,922,000,000
Intangible Assets $1,508,534,000
Total Liabilities $2,150,607,000
Shares Outstanding (Diluted Average) 21,192,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate
Dec2017 $13.37
Dec2016 $13.02
Dec2015 $11.47
Dec2014 $5.62
Dec2013 $4.67
Dec2012 $4.33
Dec2011 $7.60
Dec2010 $1.43
Dec2009 $0.51
Dec2008 $0.88
Dec2007 $0.52
Dec2006 -$0.07
Dec2005 $0.03
Dec2004 $0.12
Dec2003 $0.91

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $8.07
Dec2017 $11.28
Dec2016 $9.43
Dec2015 $7.34
Dec2014 $5.09
Dec2013 $4.45
Dec2012 $3.88
Dec2011 $3.17
Dec2010 $0.85
Dec2009 $0.50
Dec2008 $0.43
Dec2007 $0.24
Dec2006 $0.13
Dec2005 $0.23
Dec2004 $0.28
Dec2003 $0.30

Recommended Reading:

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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