Constellation Software (TSX:CSU) is a TSX tech stock that has crushed broader market returns since its initial public offering in May 2006. In the last 18 years, CSU stock has returned an emphatic 20,120% to shareholders, turning a $5,000 investment into $1 million in this period.
Valued at $78 billion by market cap, Constellation Software is among the largest companies in Canada. Let’s see why this millionaire maker TSX stock is still a good buy right now.
An overview of Constellation Software
Constellation Software acquires, manages, and builds vertical market software businesses. Typically, these businesses offer enterprise-facing mission-critical software solutions that address specific customer requirements in niche markets.
Over the years, Constellation Software has focused on acquiring profitable businesses with growth potential, which has allowed it to drive revenue and cash flows higher.
Its unique business model allows Constellation Software to benefit from high customer engagement and retention rates, enabling the tech giant to generate stable cash flows across business cycles.
Constellation Software’s revenue consists of software license fees, maintenance fees, professional service fees, and hardware sales. Its software license fee includes non-recurring fees charged for the use of its software products licensed under multi-year or perpetual agreements.
Further, the maintenance revenue is derived from customer support fees for software products and includes recurring fees generated from support contracts, transaction sales, managed services, and hosted SaaS (software-as-service) products.
Finally, a professional fee is charged for implementation services, product training, and consulting, while hardware revenue includes the resale of third-party hardware as part of customized solutions.
How did Constellation Software perform in 2023?
Despite a challenging macro environment in the last year, Constellation Software increased sales by 27% year over year to $8.4 billion in 2023, up from $6.6 billion in 2022. Its net income rose by 10% to $565 million or $26.67 per share in 2023, up from $512 million or $24.18 per share in 2022.
The tech heavyweight reported an operating cash flow of $1.78 billion and a free cash flow of $1.16 billion in 2023, which suggests it spent more than $600 million in capital expenditures. Further, Constellation Software deployed $2.6 billion towards acquisitions, which were a key driver of top-line growth in 2023.
Constellation Software pays shareholders an annual dividend of $5.50 per share, translating to a forward yield of just 0.15%. However, these payouts have risen by 11% annually in the last 15 years, enhancing the effective yield over time.
While CSU’s free cash flow rose by 36% year over year in 2023, it did not generate enough funds to cover its acquisitions and dividends. Instead, the company raised debt to fund its acquisitions, ending the year with a total debt of $3.33 billion, up from $1.97 billion in 2022.
Is CSU stock overvalued?
Bay Street expects CSU to expand adjusted earnings from $87.45 per share in 2023 to $110 per share in 2024 and $133.7 per share in 2025. Priced at 33.6 times forward earnings, CSU stock is not very expensive as it is forecast to increase earnings by 25% annually in the next five years. Analysts remain bullish and expect CSU stock to rise by 10% in the next 12 months.
