Canstellation Software (CSU-T) top pick from Kim Bolton on BNN.ca Market Call Tuesday Feb 2nd @ 1200ET
The company's business strategy is to acquire software startups, and then hold them for the long term. It has acquired over 260 startups since being founded. It focuses on vertical market software companies (i.e. those that create software for a particular industry or market, as opposed to creating software usable for a wide variety of markets) The company has a 10-year average ROIC of 32 per cent.
Competition is increasing, but overpaying for companies makes it hard for them to sustainably generate profits. The ability to scale across different verticals remains one of its key moats. Their growth over the years is heavily dependent on acquisitions, while organic growth over the last 6 years was between 1-2 per cent per year.
The recent decline in growth rate due to their large market cap. If they continue to use the same strategy of acquiring small companies (~$6M), growth will be slow moving forward. In order to sustain its growth, it must start looking into larger acquisitions, which carry more risk.
Constellation is historically profitable (TTM: $4.8B revenue and $380M net profit), carries little debt, and generates solid free cash flows ($3.2B over the last 5 years).
Constellation Software has six operating segments: Volaris Group: focuses on acquiring software businesses serving various areas, including agri-business, financial services, and education. It has approximately 45 constituent software businesses. Harris Computer Systems: primarily serves the public sector, including utilities, education, and healthcare. It has 31 constituent businesses. Jonas Software: operates 70 companies, primarily in the hospitality and construction sectors. Vela Software: operates 8 divisions, primarily focuses on the industrial sector, including oil and gas and manufacturing Perseus Operating Group: operates in a variety of industries, including home building, pulp and paper, and real estate Total Specific Solutions: focuses on software companies in the UK and Europe |
