Toronto-based Constellation Software (TSX:CSU) has continued its remarkable growth journey, investing over $2 billion into new businesses in 2023 alone. The company's strategy of acquiring niche software businesses at lower valuations and generating significant cash flow from these acquisitions has yielded high double-digit returns.
The company's buy-and-never-sell approach has resulted in the acquisition of over 1,000 software businesses, and it maintains a database of more than 50,000 potential acquisitions. Despite having a hefty market cap of $60.7 billion, Constellation still offers substantial growth opportunities.
In recent years, Constellation has started spinning out parts of its business to shareholders, including Topicus and Lumine Group. This move is indicating the likelihood of future attractive returns for shareholders.
The company's success can be traced back to 2008 under the leadership of an initially untested CEO. A $10,000 investment made then would have grown to $1.17 million today, reflecting a 30% compounded annual growth rate.
Operating in the economically resilient sector of niche software businesses, Constellation has demonstrated steady growth and reliable returns over the past 15 years. Starting with a market cap of $525 million in 2008, Constellation achieved a compound annual growth rate of about 30% over the past decade.
This success is largely due to the CEO's skillful capital allocation and the company's ability to generate robust cash flow from its acquired businesses that have low customer churn rates. The company's strategy and resilience have transformed a $10,000 investment into an impressive $1.17 million over the past decade and a half.
InvestingPro Insights
Constellation Software's (CSU) successful strategy of acquiring niche software businesses and generating significant cash flow is reflected in its high earnings quality, with free cash flow exceeding net income, a highlight from InvestingPro Tips. Moreover, the company's robust performance has allowed consistent dividend payments for 17 consecutive years, further enhancing its appeal to investors.
InvestingPro's real-time data reveals that Constellation Software's Price to Earnings (P/E) Ratio stands at 13.37 as of Q2 2023, indicating a relatively high earnings multiple. The company's revenue growth is also impressive, reporting a 21.4% increase over the last twelve months as of Q2 2023. Additionally, the company's Price to Book ratio is 1.52, suggesting that the stock might be trading at a premium.
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