Another strong quarter meant another climb in stock prices for Canadian-based Constellation Software. Despite stock prices making the $1,000 mark, Edgehill Partners’ Jason Mann is a fan of their fundamentals and says there is still room for growth.
In mid-February, the company’s fourth quarter and year end reports showed $831 million in revenue and 21 per cent in year-over-year increase. For 2018, the company’s top line grew by 23 percent while its net income was upped by 71 percent.
“They really are quite amazing,” Mann said in a Bloomberg interview. “They are growth by acquisition; they do dozens and dozens of acquisitions around the world every year and yet they still manage to hit their numbers, have huge return on equity. It’s one of the best managed companies in terms of generating profitability for equity holders.”
Constellation is unique in the sense that their primary purpose is not to sell a product or service. They are in the business of acquiring, managing and building software companies that are leaders in their fields. Portfolio companies are mutually agreed upon purchases between Constellation and their partner-companies and management is left largely in the hands of the existing leadership team.
Mark Leonard founded the company in 1995 and bases their operations in Toronto, Ontario. By all reports, Leonard is a private individual and very rarely makes public appearances or gives interviews. In 2014, a Globe and Mail journalist requested an interview that Leonard politely declined via email: “Kind of you to offer but I discovered when I was in venture business that interviews aren’t for me…I do occasionally speak with students, but usually in the vain hope that I can distract them from pursuing careers in investment banking and private equity.”
Despite the tongue-in-cheek tone of Leonard’s last statement about steering students away from these careers, there is a kernel of truth that Leonard has taken into his investment approach with Constellation Software. After eleven years in the venture capital business, Leonard learned that the impatient, short-term view often adopted by the industry meant that great companies got missed because they were too small to get noticed.
His philosophy of buy and hold means big things for little companies. Typically, the company’s purchases are between $2 to $4-million and are held indefinitely. That means long-term stability, industry expertise, and growth opportunities for the partner companies and high-earning revenues for the parent. Constellation prefers to invest in software start-up companies that serve a very specialized market and this strategy has led to great success.
Constellation is organized into six segments – Volaris Group, Harris Computer Systems, Jonas Software, Vela Software, Perseus Operating Group, and Total Specific Solutions – under a broader division of public and private sectors.
Mann believes that Constellation still has room to grow and urges investors to take a second look. “It’s still quite a reasonably priced company and you look at long-term chart on it, it’s a rock star,” said Mann. “It’s got good price momentum, reasonable valuation. They don’t pay out a lot of yield; they use that cash for deals and that’s fine because they can convert it into earnings.”
