CA - Constellation Software: Deteriorating ROIC And High Valuation Fading Excellence

2024-04-23 01:44:18 ET

Summary

• Constellation Software's disciplined approach to acquisitions has generated significant shareholder value, but future returns may be impacted by the pool of attractive acquisition opportunities.
• Illiquid companies with high ROIC and limited organic growth opportunities probably drive the strongest returns, but Constellation Software is being forced to expand beyond these.
• The stock should continue to perform well, particularly if Constellation Software can continue to successfully expand its investment universe.
• Future returns will be far lower than in the past, though, given both the company's deteriorating ROIC and high valuation.

Constellation Software's ( CNSWF ) targeted and disciplined approach to acquisitions has enabled the company to generate enormous shareholder value over a multi-decade period. With the company's revenue multiple having expanded significantly, and the quality of acquisition opportunities clearly deteriorating, it is reasonable to question how strong future returns will be.

When really good companies start trading at 5 and 6 times revenues, it's time to start worrying. I hope our shareholders are never in that position. - Mark Leonard ( 2015 President's Letter )

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