CSU Reported 22% Growth in Q2

Constellation Software CSU reported strong Q2 earnings, with revenue and free cash flow (FCF) for the past 6 months grew by 22% and 34% respectfully compared to the previous year. While the majority of this growth comes from acquisitions, it is encouraging to see a 6% organic growth in the company’s maintenance recurring revenues, which accounted for 74% of the total revenue. This is the type of high quality revenues I want to see more in CSU, as it is much more predictable and less volatile than other income sources.

The current TTM FCF per share is CA$86, resulting in an expensive price to FCF ratio of 47.

The company continued to deploy capital prudently, doing cash only acquisitions without diluting shareholders. For the past 6 months CSU spent $805 million out of the $1 billion operating cashflow for acquisitions.

The DCF calculated fair value is about CA$4,427 per share, indicating a CAGR of 12% in the next 5 years. Here are the assumptions:

• Latest TTM FCF CA$1.816 Billion
• FCF growth rate of 15% (5YR AVG 17.5%)
• 0% Share dilution (CSU never diluted)
• Future Price/FCF ratio of 30 (5YR AVG 38)
• Discount rate of 10%

I believe the share price is on the expensive side, given the high projected growth rate and P/FCF ratio. That said, there is no doubt that CSU is one of the highest-quality companies with exceptional management teams, and such companies rarely trade at a discount. I will personally continue to hold the stock.

If you are interested in how I value stocks using the DCF model, be sure to check out this recent video where I walk you through the process step-by-step: https://youtu.be/flzfqXZBxNg

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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.