CSU - Constellation Software

[KCLarkin]

Gio, found the chart here:

https://www.scribd.com/fullscreen/264532293?access_key=key-efu1kxR1RPc9rJDDeWNm&allow_share=true&escape=false&view_mode=scroll

 

I'm not sure how accurate it is but seems to indicate a large potential pool of acquisitions.

[giofranchi]

Gio, found the chart here:

https://www.scribd.com/fullscreen/264532293?access_key=key-efu1kxR1RPc9rJDDeWNm&allow_share=true&escape=false&view_mode=scroll

 

I'm not sure how accurate it is but seems to indicate a large potential pool of acquisitions.

 

Thank you very much! :)

This helps a lot!

 

Btw, I have just opened a 9% position.

And I will gladly average down whenever the multiple CSU is selling for contracts.

 

Cheers,

 

Gio

[abyli]

Welcome to CSU! I feel this is the best company I have ever seen, that is why pinged you a few days ago! Now let's hope the market crash. :)

 

Bing

[giofranchi]

Welcome to CSU! I feel this is the best company I have ever seen, that is why pinged you a few days ago! Now let's hope the market crash. :)

 

Bing

 

Yeah!... If a market crash is around the corner, CSU multiple will probably get cut in half... But... For what I have read, Leonard is litteraly praying for another 2008-2009... And I would say this company should be able to grow much faster in a very volatile environment than if this muddle through scenario goes on.

 

Cheers,

 

Gio

[Liberty]

Welcome to CSU! I feel this is the best company I have ever seen, that is why pinged you a few days ago! Now let's hope the market crash. :)

 

Bing

 

Yeah!... If a market crash is around the corner, CSU multiple will probably get cut in half... But... For what I have read, Leonard is litteraly praying for another 2008-2009... And I would say this company should be able to grow much faster in a very volatile environment than if this muddle through scenario goes on.

 

Cheers,

 

Gio

 

A downturn might help, but Leonard has said that he was surprised at how few VMS companies were distressed in 2008-2009, so in a lesser downturn than that, the bargain hunting probably wouldn't be all that exceptional. On the other hand, it means that the VMS businesses that they already have probably won't suffer as much as companies in other industries, so the defensive posture is solid.

[giofranchi]

On the other hand, it means that the VMS businesses that they already have probably won't suffer as much as companies in other industries, so the defensive posture is solid.

 

Yes, of course!

Anyway, this is what Leonard had to say during Q1 2015 conference call:

If we get another ’07 or ’08, we hope that we will be buying willy-nilly and if we get a bubble then one hopes to be out of the market entirely.

And I would also argue that the next downturn might probably be for technology more like 2001-2002 than 2007-2008.

 

Cheers,

 

Gio

 

[giofranchi]

Constellation Software’s Harris Division completes the acquisition of Picis

 

http://www.csisoftware.com/2015/06/constellation-softwares-harris-division-completes-the-acquisition-of-picis/

 

 

Gio

[oddballstocks]

On the other hand, it means that the VMS businesses that they already have probably won't suffer as much as companies in other industries, so the defensive posture is solid.

 

Yes, of course!

Anyway, this is what Leonard had to say during Q1 2015 conference call:

If we get another ’07 or ’08, we hope that we will be buying willy-nilly and if we get a bubble then one hopes to be out of the market entirely.

And I would also argue that the next downturn might probably be for technology more like 2001-2002 than 2007-2008.

 

Cheers,

 

Gio

 

I don't think it'll be like either.  We're always looking forward thinking it'll be the same as the past.  In Zero to One by Thiel (loved the book by the way) he talks about how the past tech crisis has colored all of the market.  He presents some compelling arguments that I agree with.

 

Here's what you'll see in a downturn.  Companies trying to re-negotiate their pricing if it's a subscription service.  Some companies will cancel.

 

My experience in this space is that a downturn isn't "bad".  It's what happens after.  In 2008 what we saw in tech was companies preferred to contract for employees rather than hire.  Companies wanted IT solutions rather than people.  There was a consulting boom building new systems.  Once these systems are built or in place they aren't thrown you.  Software is one of the most incredible lock ins there is.

 

What could happen though is reduced demand after the recession as companies are afraid to buy a system.

[giofranchi]

Software is one of the most incredible lock ins there is.

 

Yeah! Mine was just a comment based on the fact the frothiness we see in tech today might be closer to what it was in 1999-2000 than in 2006-2007…

Anyway, thank you! :)

 

Cheers,

 

Gio

 

[oddballstocks]

Software is one of the most incredible lock ins there is.

 

Yeah! Mine was just a comment based on the fact the frothiness we see in tech today might be closer to what it was in 1999-2000 than in 2006-2007…

Anyway, thank you! :)

 

Cheers,

 

Gio

 

Frothy on what though?  Sure the consumer stuff is out there, the ubers and all.  But in the enterprise space (where the real money is made) it seems to be business as usual.  If things do pop I'm sure there will be thousands of websites ending with -ly that go under.  But the stalwarts who've entrenched themselves in the enterprise space will not.

 

I run my business on Quickbooks (I hate it) downloaded to my laptop.  There are some SaaS solutions out there.  I'm not using any.  Why?  What happens if one of them suddenly disappears.  I want to run my core accounting on a package that I own.  If Quickbooks goes under I can still run the program and I don't lose any data.  When you go SaaS your data is now living somewhere else, that's a risk that needs to be mitigated somehow.

 

I'm encouraged by the changes we're seeing in tech.  We're starting to realize some of the dreams we had 20 years ago, they're possible now.  But there is a lot of hype for some, and my gut says we're going to see a lot of acquisitions for the real game changers.  You get a company like IBM looking to grow, they're not going to develop new things, they just don't, that's not their culture.  But they buy the new changes, they go out and buy an innovative company and then essentially establish that this new thing isn't going away because they have IBM's backing.

 

Maybe I'm just talking in circles, I don't know. 

 

 

[giofranchi]

There are some SaaS solutions out there.  I'm not using any.  Why?  What happens if one of them suddenly disappears.  I want to run my core accounting on a package that I own.  If Quickbooks goes under I can still run the program and I don't lose any data.  When you go SaaS your data is now living somewhere else, that's a risk that needs to be mitigated somehow.

 

So, have you a negative view on businesses that offer SaaS solutions? CSU owns lots of them, if I am not mistaken.

 

Gio

[oddballstocks]

There are some SaaS solutions out there.  I'm not using any.  Why?  What happens if one of them suddenly disappears.  I want to run my core accounting on a package that I own.  If Quickbooks goes under I can still run the program and I don't lose any data.  When you go SaaS your data is now living somewhere else, that's a risk that needs to be mitigated somehow.

 

So, have you a negative view on businesses that offer SaaS solutions? CSU owns lots of them, if I am not mistaken.

 

Gio

 

I sound like an economist...it depends.  I own a SaaS business, so clearly I'm not that negative.  My business is a little different in that I'm providing a research solution and tools online vs replacing a company's core accounting system.

 

I use a GPS watch for running, it uploads my runs to Garmin.  I like looking at the reports on there, but in the back of my mind I view it as a throwaway, eventually this data will somehow disappear.  Compare that to the fact that I have zip files of all of my documents dating back to the 1990s including emails.  Why I have it, I don't know, but I can pull back an email I sent my brother in 1999.  Whereas the online stuff I was using back then is lost now.

 

Large companies are all still in-house.  I've seen a lot of projects around cloud integration.  Building connectors between the cloud and local systems.  But I haven't heard of a large company ditching their core systems for a cloud solution.  Maybe it's happening somewhere, not sure.

 

Many smaller companies don't need to manage an inhouse system though.  That's where SaaS shines.  Something like Salesforce is perfect for a small manufacturing company.  They can get a great CRM product and not have to deal with any maintenance or support, it's hosted for them.  Their data is hostage, but that's the trade-off.

[Liberty]

There are some SaaS solutions out there.  I'm not using any.  Why?  What happens if one of them suddenly disappears.  I want to run my core accounting on a package that I own.  If Quickbooks goes under I can still run the program and I don't lose any data.  When you go SaaS your data is now living somewhere else, that's a risk that needs to be mitigated somehow.

 

So, have you a negative view on businesses that offer SaaS solutions? CSU owns lots of them, if I am not mistaken.

 

Gio

 

Mark Leonard has said multiple times that he doesn't think the economics of SaaS are as good as perpetual license software + maintenance in his VMS niches, but that many of his customers demand it, and they're providing it in many cases.

 

One of the downsides of SaaS is psychological; you don't have a big upfront cost, so you don't feel as tied to it (smaller sunk cost), you just pay your monthly or quarterly bill... But if you pay a lot of money on day 1 for expensive software (especially customized), you'll want to get your money's worth, so you'll likely keep using it for a while (and pay maintenance fees).

 

If you're a large bank or whatever, SaaS probably doesn't interest you too much because your data is sensitive and you already have internal IT capabilities. But if you're a small operation, chances are that you'll gladly outsource all that IT stuff to someone else, which makes SaaS attractive.

[giofranchi]

oddballstocks, Liberty, thank you! :)

 

Cheers,

 

Gio

[gary17]

Liberty, Gio or anyone else

I am wondering if you are familiar with CSU's competitors and CSU's competitive advantage....  CSU now earns a high ROE - let's assume no growth  for a minute - how would investors evaluate whether they can continue to fight off competitors and maintain this high return ?

[KCLarkin]

Gary, they have various competitors and I don't think that is the right way to look at the business. For BRK, you could look at See's or Geico's or BNSF competitors but it wouldn't tell you much given the diversification.

 

If you look at table 2 in the 2014 president's letter, they show organic growth. If that starts going negative, you should be concerned.

[giofranchi]

Gary, they have various competitors and I don't think that is the right way to look at the business. For BRK, you could look at See's or Geico's or BNSF competitors but it wouldn't tell you much given the diversification.

 

If you look at table 2 in the 2014 president's letter, they show organic growth. If that starts going negative, you should be concerned.

 

I agree!

What I liked right away about Leonard is his very clear way of talking about existing businesses, and therefore his focus on organic growth results.

 

I think an easy and clear view on organic growth is simply essential to make an investment in any business which makes lots of acquisitions. Actually, I have often said the lack of an easy way to judge organic growth has been the reason I decided to watch VRX from the sidelines for a while.

 

With CSU I have never had this problem! ;)

 

In 10 days more cash comes in, and I am buying more CSU.

 

Cheers,

 

Gio

[giofranchi]

Just bought more! ;)

 

Cheers,

 

Gio

[gary17]

Gio / Liberty

I wonder if you have a # in mind for CSU's intrinsic valuation ... do you see a margin of safety of at least 50% at current prices ?

 

 

[rukawa]

I feel like the assumptions needed to justify the price are fairly aggressive. Its basically trading at 422/16.5=25 time current operating cash flow. Its not cheap.

 

 

[Guest Schwab711]

Has anyone subscribed to any of the debenture offerings? Are the debentures issued in the past traded at all? Has anyone sold their rights?

 

Looks like guaranteed money since it's CAD2.73 (10.5 rights) to be able to buy CAD100 debenture for CAD95 (8.5% first 9 months then 6.5% + CA CPI after).

 

http://www.csisoftware.com/2015/03/constellation-software-inc-announces-rights-offering-of-debentures-2/

[giofranchi]

Gio / Liberty

I wonder if you have a # in mind for CSU's intrinsic valuation ... do you see a margin of safety of at least 50% at current prices ?

 

$16.11 per share is 2014 operating cash flow. If you subtract interest and capex, you get $14.82 per share of FCF. Let’s suppose operating cash flow per share, and therefore also FCF per share, in 2015 grow in line with their growth rate of the last few years, let’s say 30% (ANI has already grown 40% in Q1 2015). Then, 2015 FCF per share might be $19.27.

Today’s multiple is $422 / $19.27 = 22x 2015 FCF.

 

Now, let’s suppose CSU grows FCF at a CAGR of 15% for the next 10 years. Can you see a company that increases FCF at a CAGR of 15% during the next decade selling for a multiple of 15x 2025 FCF? Of course! Right? Therefore, let’s also suppose CSU is selling for a multiple of 15x 10 years from now.

 

In this scenario, you would get a return of 10.5% compounded annually.

 

So, let me summarize:

 

Here we have a company operating in a growing market which already has:

- 17,144 companies with annual revenues below $200 million plus

- 16,536 companies with annual revenues below $100 million

That could be bought, just in the US, Canada, and Europe. Not to mention EM of course!

With $1.67 billion in 2014 revenues CSU imo is still a small company, at least if compared to the size of the market in which it operates.

 

Leonard is not yet 60.

 

There is no real reason why CSU should materially slow down: opportunities still abound and the quality of its management won’t change for the worse anytime soon.

 

We are assuming a CAGR in FCF per share that slows down from 39% to 15%, almost without justification (except perhaps no company that I know of has ever sustained a CAGR in FCF per share of 39% for a long time), and a multiple contraction from 22x to 15x… and still we get a return of 10.5% compounded annually… in a world where the cost of money is 5%... Really?! Well, I would be hard pressed to find a better definition of “margin of safety” in investing! ;)

 

Gio

 

[petec]

Gio / Liberty

I wonder if you have a # in mind for CSU's intrinsic valuation ... do you see a margin of safety of at least 50% at current prices ?

 

$16.11 per share is 2014 operating cash flow. If you subtract interest and capex, you get $14.82 per share of FCF. Let’s suppose operating cash flow per share, and therefore also FCF per share, in 2015 grow in line with their growth rate of the last few years, let’s say 30% (ANI has already grown 40% in Q1 2015). Then, 2015 FCF per share might be $19.27.

Today’s multiple is $422 / $19.27 = 22x 2015 FCF.

 

Now, let’s suppose CSU grows FCF at a CAGR of 15% for the next 10 years. Can you see a company that increases FCF at a CAGR of 15% during the next decade selling for a multiple of 15x 2025 FCF? Of course! Right? Therefore, let’s also suppose CSU is selling for a multiple of 15x 10 years from now.

 

In this scenario, you would get a return of 10.5% compounded annually.

 

So, let me summarize:

 

Here we have a company operating in a growing market which already has:

- 17,144 companies with annual revenues below $200 million plus

- 16,536 companies with annual revenues below $100 million

That could be bought, just in the US, Canada, and Europe. Not to mention EM of course!

With $1.67 billion in 2014 revenues CSU imo is still a small company, at least if compared to the size of the market in which it operates.

 

Leonard is not yet 60.

 

There is no real reason why CSU should materially slow down: opportunities still abound and the quality of its management won’t change for the worse anytime soon.

 

We are assuming a CAGR in FCF per share that slows down from 39% to 15%, almost without justification (except perhaps no company that I know of has ever sustained a CAGR in FCF per share of 39% for a long time), and a multiple contraction from 22x to 15x… and still we get a return of 10.5% compounded annually… in a world where the cost of money is 5%... Really?! Well, I would be hard pressed to find a better definition of “margin of safety” in investing! ;)

 

Gio

 

Gio,

 

a couple of questions:

 

1. Is your FCF number before or after acquisition spend?  If a lot of the FCF has to be spent on acquisitions in order to get the growth, how does that affect your thinking?

 

2. Do you mean 17,144 companies below $200m revenues, or 17144 between $100m and $200m revenues?

 

Thanks!

 

Pete

[giofranchi]

Gio,

 

a couple of questions:

 

1. Is your FCF number before or after acquisition spend?  If a lot of the FCF has to be spent on acquisitions in order to get the growth, how does that affect your thinking?

 

2. Do you mean 17,144 companies below $200m revenues, or 17144 between $100m and $200m revenues?

 

Thanks!

 

Pete

 

Hi Pete,

 

1) I define FCF as cash flow from operations less interests paid, less capital expenditures (maintenance capex + organic growth capex). Acquisitions imo are investments for external growth. And of course any investment for external growth is capital that could be withdrawn by shareholders without affecting the already existing businesses at all. Not even their organic growth!

Therefore, it doesn’t affect my thinking at all.

 

2) Sorry! It was not clear. Let’s look at the slide in attachment (which had already been posted before):

There are in the US, Canada, and Europe 17,399 companies with annual revenues below $300 million. This is the overall number of companies that could be purchased. Compare this number with 131 acquisitions made by CSU during the last 5 years.

 

Cheers,

 

Gio

[giofranchi]

Therefore, it doesn’t affect my thinking at all.

 

Let me explain: a 5% organic growth alone might be enough to justify a multiple of 15x FCF, yet 10 years from now opportunities for acquisitions will be far from over! Therefore, in 2025 the market most probably will price CSU as a business that might still go on growing both organically and through acquisitions.

 

Gio