Author Topic: CSU - Constellation Software  (Read 153630 times)

Liberty

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CSU - Constellation Software
« on: June 08, 2015, 07:44:42 AM »
Great Canadian software company focusing on a variety of vertical software markets. Been one of my faves for a few years, though I've never really talked about it here. A few people felt it deserves a thread, so let's make one!

Mark Leonard, the CEO, is in my opinion one of the best managers and capital allocators out there. His letters to shareholders (used to be quarterly, now yearly) and calls are worth checking out.

A lot of people will no doubt consider it expensive as it tends to hover in the 20-25x FCF lately, but it all depends how much you think quality is worth and what future growth/capital deployment for it is going to look like...
« Last Edit: June 08, 2015, 07:50:17 AM by Liberty »
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giofranchi

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Re: CSU - Constellation Software
« Reply #1 on: June 08, 2015, 07:59:24 AM »
Thank you, Liberty! :)

Cheers,

Gio
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Phaceliacapital

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Re: CSU - Constellation Software
« Reply #2 on: June 08, 2015, 08:00:48 AM »
I looked at it and saw Mark speak at the Ivey conference (which was quite the presentation...).

CSU is indeed active in vertical software, but the guy is basically running a listed private equity company right? From the material I read or heard, he almost never discloses business specifics, it's all IRR, payback periods etc.. Obviously he's very smart, but I found it difficult to determine his competitive advantage, especially at this valuation. For what it's worth, I think it's also in Giverny's portfolio..
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Liberty

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Re: CSU - Constellation Software
« Reply #3 on: June 08, 2015, 08:11:14 AM »
I looked at it and saw Mark speak at the Ivey conference (which was quite the presentation...).

CSU is indeed active in vertical software, but the guy is basically running a listed private equity company right? From the material I read or heard, he almost never discloses business specifics, it's all IRR, payback periods etc.. Obviously he's very smart, but I found it difficult to determine his competitive advantage, especially at this valuation. For what it's worth, I think it's also in Giverny's portfolio..

Yep, very little about operations is disclosed, which can be a turnoff for many.

But there are so many businesses (it's not a constellation for nothing...) in so many niches that I'm not sure how they could disclose things without it it being really clunky. There are also a lot of things that you want to keep quiet for competitive reasons.

I think the competitive advantage at the corporate level is capital allocation and M&A, and at the operational level, each tiny business tends to have very little competition because they operate in niches that are too small for the big software players to care about, and they are integrated into the mission-critical parts of various businesses with customized products (back-office stuff for a cab company, a hospital, a school district, whatever), stuff that doesn't change very often, very sticky once you're in, very recurring.
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abyli

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Re: CSU - Constellation Software
« Reply #4 on: June 08, 2015, 08:16:10 AM »
Listening to how Mark talks in conference call reminds me of Warren Buffett, very rational thinking. Both can convert complicated things into a few key factors, very few people can do that. Most conference calls make my brain dizzy, especially when analysts ask stupid questions and CEOs just replied back with fuzzy answers. :-)

giofranchi

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Re: CSU - Constellation Software
« Reply #5 on: June 08, 2015, 08:34:03 AM »
Yep, very little about operations is disclosed, which can be a turnoff for many.

I have just read Leonard's last AL and I have found it very complete. With much emphasis on the performance of existing businesses, which of course is what you want to see in any company that relies heavily on M&A.

Gio
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Liberty

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Re: CSU - Constellation Software
« Reply #6 on: June 08, 2015, 08:41:38 AM »
Yep, very little about operations is disclosed, which can be a turnoff for many.

I have just read Leonard's last AL and I have found it very complete. With much emphasis on the performance of existing businesses, which of course is what you want to see in any company that relies heavily on M&A.

Gio

I think what Phaceliacapital meant is that you could read all the letters and listen to all the calls and still not be sure what Constellation actually does except run vertical market software (VMS) businesses. You'd get all the financial details about performance, but not much talk about products, managers at the operations level, customers, etc. You have to dig by yourself to figure out more about all that stuff.
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berkshire101

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Re: CSU - Constellation Software
« Reply #7 on: June 08, 2015, 08:44:47 AM »
Amazing company and management!  I wish I bought more a while back.  Oh wells.
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KCLarkin

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Re: CSU - Constellation Software
« Reply #8 on: June 08, 2015, 08:47:37 AM »
The moat of this business is very easy to understand:
- Enterprise software in general is inherently sticky (it is very difficult to replace a mission critical vendor)
- Niche businesses limit competition
- Scale advantages - bolt-on acquisitions deepen the moat
- High level of recurring revenue
- Diversified products and customer base
- Disciplined capital allocation

CSU is particularly attractive relative to other PE-type companies (3G, VRX) since it can fund acquisitions almost entirely from cash flow. The cash ROI is phenomenal. The company does not issue stock (for acquisitions or options). The company has a tiny amount of debt relative to FCF.

The CEO is exceptional. He does not take any salary, bonus, options, and pays his own travel expenses. He is one of very few CEO's who writes an annual report that is actually helpful to investors. The 10 year growth rate for EPS is 32%.

The drawbacks:
- Price is elevated. It was relatively cheap in fall 2014 but has had a big run-up
- Limits to growth? As the company grows, it will need to look at bigger acquisitions with lower ROI
- Cloud: The company will be purchasing more SaaS companies in the future. Cloud economics are much worse than traditional enterprise software.
- CEO with one foot out the door? CEO stopped taking a salary so he wouldn't feel guilty about spending more time with family. I suspect he enjoys the game so much that he will never retire.

Even though this is my favorite company, I foolishly decided to average into it and it is only 4% of my portfolio. Now the price is high enough to give me pause.

KCLarkin

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Re: CSU - Constellation Software
« Reply #9 on: June 08, 2015, 08:52:52 AM »
I think what Phaceliacapital meant is that you could read all the letters and listen to all the calls and still not be sure what Constellation actually does except run vertical market software (VMS) businesses. You'd get all the financial details about performance, but not much talk about products, managers at the operations level, customers, etc. You have to dig by yourself to figure out more about all that stuff.

Personally, I think this is noise. You could spend a lot of time trying to understand the competitive dynamics of the golf course management software but I don't think it would improve your investment decision.