It’s a common fact that there isn’t much to choose from when it comes to high-flying tech stocks trading on the TSX. For those of us searching for next-level returns that can be offered by innovative titans, venturing south of the border is usually a good way to go.
With the Canadian dollar now north of US$0.80, it’s probably a wise decision to start making the swap to buy some U.S. tech stocks, but for those who believe the Canadian dollar still has more room to run, swapping all your Canadian dollars for greenbacks may not be the best strategy. In addition, pundits believe the U.S. market is overheated as it continues to push towards all-time highs. Meanwhile, the TSX hasn’t gone anywhere this year, and pundits believe the Canadian market is where value hunters want to be right now.
Constellation Software Inc. (TSX:CSU) is a Toronto-based tech company which specializes in the development, installation, and customization of software aimed at the public and private sector markets. Despite delivering an astounding return of ~555% over the past five years, the stock has flown under the radar of most Canadians.
Most of the Constellation’s growth has been through strategic acquisitions, and going forward, if the same magnitude of growth is to be expected, the company is going to have to continue to wheel and deal. The management team has a solid set of criteria that it follows when it looks for acquisitions. It looks for exceptional vertical market software companies with consistent earnings and growth trajectory and top-notch management teams.
Constellation has been able to put up remarkable ROE and ROIC numbers over the last decade. For the last year, the company clocked in a ROE and a ROIC of 50.69% and 29.55%, respectively. There’s no question that the management team knows how to turn its investments into earnings growth, and there’s reason to believe that more of the same can be expected.
What about valuation?
Constellation is a terrific roll-up play that has grown its EPS by leaps and bounds over the last decade. I believe the management team deserves a premium; however, I’m not sure if the hefty premium that exists today makes the stock an attractive pickup for the average Canadian growth investor.
Shares currently trade at a hefty 51.7 price-to-earnings multiple, a 22.6 price-to-book multiple, and a 5.1 price-to-sales multiple, all of which are higher than the company’s five-year historical average multiples of 45.6, 19.4, and 3.8, respectively. The stock is expensive, and if the company can’t continue to consistently deliver in each quarter, a sell-off may create a better entry point for value-conscious investors.
The company delivered double-digit percentage year-over-year increases in revenue, adjusted EBITDA, and EPS in its last quarter, so the bar has been set high. If Constellation can’t pass the bar, a potentially nasty correction could present itself; however, I wouldn’t consider it anything more than a buying opportunity.
Stay smart. Stay hungry. Stay Foolish.
