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One of the easiest ways Canadians can grow capital and build sizeable retirement portfolios is through buying and holding growth stocks. Technology has been the fastest growing sector historically. Consider how Constellation Software (TSX:CSU), one of Canada’s most successful technology companies and the TSX’s most consistent growth stock, produced a spectacular 27,134% total return to investors over 18 years.
Constellation Software’s two-decade winning strategy has been simple: buy small software firms serving niche markets with high pricing power, integrate them into a more efficient group, and harvest their resilient cash flow from sticky customer groups – rinse and repeat. The company continues to do well, and CSU stock is up 39.4% over the past year.
Following its success, the company separately listed two former subsidiaries, namely Topicus.com (TSXV:TOI) in 2021 and Lumine Group (TSXV:LMN), which was spun out in 2023. These companies are following their former parent’s successful model of acquiring niche software companies and benefit from Constellation Software’s expertise while charting their own courses. They are poised to continue growing, and growth-oriented investors may wish to take a closer look.
Let’s see why you may wish to consider one or both for inclusion in a long-term growth-oriented portfolio.
Lumine Group stock soars 135% after spin-off: Mirroring Constellation Software stock’s success
Lumine Group spun out of Constellation Software in 2023. It’s replicating Constellation Software’s acquisitions-led growth strategy in the communications and media software market niche. The strategy is executing well and LMN stock is up 135% over the past year.
The company grew revenue by 95% year over year to $499.7 million in 2023 with operating income reaching $144.7 million, up 115%, primarily driven by accretive acquisitions. A recently closed acquisition of former mobile phone manufacturing giant Nokia’s device management and service management platform businesses this month for EUR185 million should be accretive to revenue and operating earnings growth in 2024 and beyond.
Bay Street analysts project continued strong growth in revenue and earnings before interest, taxes, depreciation, and amortization (EBITDA) at 38.6% and 40.5% per annum, respectively, over the next two years.
The business is highly profitable with a 91.5% gross margin and EBITDA margin of 29.4% in 2023. Although the global software firm acquirer reported a $2.8-billion net loss last year, the loss emanated from non-cash revaluation charges relating to convertible preferred shares. These are increasingly more valuable as Lumine stock soars.
Lumine Group stock’s forward price-to-sales (P/S) multiple of 9.3 is on the steep side compared to an average P/S multiple of 6.6 for its industry. However, the company’s strong growth outlook and positive cash flow may justify a premium.
Topicus.com stock up 38% YTD: Europe’s growth engine?
Profitable tech consolidator Topicus.com acquires vertical market software companies in Europe. The $10-billion company, spun off from Constellation Software, has gained 95.9% since its 2021 initial public offering (IPO), and is up 38% so so far this year. Can it replicate Constellation’s success?
Topicus leverages its former parent’s successful acquisitions-led growth strategy. It acquires, manages, and builds vertical market software businesses, focusing on the European market.
The company grew revenue at an average rate of 31.6% annually over the past three years and increased its earnings per share by 17.6% annually during the period. Organic growth remains positive in the high single-digit range, but acquisitions are doing most of the heavy lifting.
Since going public in 2021, Topicus has splurged more than €700 million (C$1 billion) on acquisitions, including €49.4 million (C$73 million) it had committed to 2024 deals by mid-February this year. Small acquisitions are a source of diversified growth, and Topicus is making lots of them. Its deal-making machine is well-oiled by internally generated free cash flow.
Free cash flow is the cash available from operations, after capital expenditures. Topicus converts about 21% of its growing annual revenue into free cash flow. Sustained free cash flow generation should help sustain the company’s acquisitions closing machine and propel TOI stock higher over time.
The company could do well if Europe generates as many acquisitions and growth opportunities as North America and other markets did for Constellation Software. Success may, in part, depend on how the E.U. economy performs going forward.
