CSU Continues Rapid Growth in Q3

Constellation Software CSU reported 20% revenue growth compared to a year ago. I’m continuously impressed by how the company is able to maintain this growth rate despite their sheer size of $94 billion.

Free cash flow (FCF) is $362 million for the quarter, down 2% compared to a year ago. I’m not too worried about this decline because CSU’s earnings can vary a lot from quarter to quarter due to the timing of contract renewals and recurring payments. If we look at the company’s 9-month free cash flow ended in Q3, the amount is $990 million, which is up 19% YoY and inline with the revenue growth. There are a few more things that I really like in this Q3 report:

-The company reported 2% organic revenue growth, reflecting continued growth of previously acquired companies. This growth is mainly driven by maintenance and recurring revenues, which is the better quality revenue out of the mix.

-CSU maintains strong financial position. For the 9 month ended in Q3, the company spent a net of US$993 million to acquire new business, less than the operating income of $1,518 million, resulting in significant increase in cash positions from $1.28 billion to $2.069 billion. Total debt with recourse to CSU is only $2.176 billion, pretty much equal to the company’s cash position.

The estimated value per share of CSU is CA$4,517.64, indicating a CAGR of 10.3% in the next 5 years. Here are the assumptions used in the DCF calculation:

Latest TTM FCF CA$1.828 Billion
FCF growth rate of 15% (5YR AVG 24.67%)
0% Share dilution (CSU never diluted)
Future Price/FCF ratio of 30 (5YR AVG 38)
Discount rate of 10%

Overall I think the current stock price is reasonable for a high quality company like CSU. I have purchased 1 more share in my Smith Maneuver portfolio today and plan to continue adding more if the stock price ever goes down.

You can also see all my past CSU stock analysis using this link.

Holdings Disclosure

SoloFIRE CSU ownership: 5% of portfolio
SoloFIRE CSU Average Cost Paid: CA$2852.22
CSU price as of writing: CA$4454.39
Holding time: 3 years

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DISCLAIMER: Solofire is not a registered financial advisor. This post contains author's personal opinion only and it should NOT be considered financial advice.