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Constellation Software: A Wonderful Business, Fairly Priced

Constellation Software Inc. (

CNSWF, Financial) (CSU:TSX) is a holding company run by Mark Leonard, a former venture capitalist. He started the company in 1995 and took it public in 2006.

The company could be described as the Berkshire Hathaway (

BRK.A, Financial) (BRK.B, Financial) for obscure (but wildly profitable) software companies. The company acquires and nurtures niche software companies (many are holding firms too) and is a premier supplier of software and services tailored for specific public and private sector industries.

Global reach and growth

Currently, its network serves over 125,000 clients across more than 100 nations with a consistent growth trajectory that has allowed it to craft a diverse portfolio of holdings, documenting substantial value for investors.

In fact, since 2018, the stock is up 210%. Since 2014, the stock is up 1,300%. Since going public in 2006, the stock is up 12,600%. More importantly, there is still plenty of growth left to come as products and services from Constellation Software will likely continue to compound at better than average rates long term.

Acquisition strategy

Since inception, the company has purchased over 800 companies across more than 100 vertical markets. Software companies are a lot easier to keep up with than a traditional business, which is why it made sense to acquire so many. It is also easier to divest if necessary and to find ways to do unpopular activities like employee layoffs to boost profitability.

That said, the primary verticals are software companies that tailor their offerings to specific industries rather than broad markets. This model allows each brand to operate with autonomy while benefiting from Constellation’s financial and operational backing. With annual cash flow just shy of $1.5 billion and total cash on hand of around $1 billion, it has a solid war chest to invest in more acquisitions going forward.

Competitive advantage

Constellation Software has a huge advantage by offering a breadth of experience to smaller software companies. It is generally a permanent investor with its acquisitions and can close super fast. It is also known for its decentralized and autonomous structure while providing guidance across its holdings if needed. It is tough to outcompete it.

Major holdings

The company has six main operating segments. Each of them is a baby holding company. It is kind of like a venture capital firm with multiple funds, but the big difference is that the acquisitions are done with its own money and very little speculation. While the holdings are public, the data and information on financial performance from each is limited to non-existent. Here’s what I could find.

Volaris Group focuses on acquiring software businesses in various areas, including agri-business, financial services and education. Volaris is another vertical market software company. It was acquired by Constellation in 2018 and, like all of its major holdings, is managed very much like its parent company acquiring software businesses serving various segments. Volaris recently completed the acquisition of DisplayNote, a wireless casting and video transmission tech player that has pretty notable customers, including Johnson & Johnson (

JNJ, Financial), the World Health Organization and the NYC Department of Education.

Harris Computer Systems develops software solutions for public sector organizations, including state and local government, public safety, utilities and educational institutions. Like Constellation and Volaris, it is an acquisition-based company. In March 2022, Constellation Software, through Harris, acquired the net assets of Allscripts Hospitals and Large Physician Practices business segment. The purchase price was around $700 million cash.

Jonas Software acquires niche software businesses, with a significant presence in North America, Europe, South America, Australia and New Zealand. Jonas has acquired over 120 software companies and encourages sharing best practices among its acquired companies. Some notable names under the Jonas umbrella include GSoft, WebRecon, Theta Technologies and C&R Software.

Vela Software focuses mainly on the industrial sector with companies like Aquila, Fog Software, Carina, Datemine and Acquire.

Perseus Operating Group operates in various industries, including automotive, home building, finance, health care and real estate with companies like R.O. Writer, Campana Systems, Market Leader, GoldCare and Constellation Homebuilder Systems.

Headquartered in the Netherlands, Total Specific Solutions focuses its acquisitions exclusively on software companies in the U.K. and Europe. Outside of the main holding Topicus, its portfolio covers virtually every single vertical that matters.

Numbers breakdown

The obvious deduction is that Constellation Software is a winner run by great management and which delivers services that should continue to scale. Its total portfolio of holdings covers everything and the compounding effect should only strengthen over time.

Constellation Software has solid fundamentals with gross margins of 34%, return on equity of 32% and return on total capital at an impressive 14.54%; plus, it is still growing profitably at 30% a year on the top line. It would not shock me in 10 years if the company added more than $5 billion in retained earnings.

Stock valuation

That said, it is not cheap. The stock trades at 86 times earnings with a price-sales ratio of 5. Yet, considering it operates in a sector where the average company is unprofitable and even market leaders trade at 10 and 20 times sales, the stock looks fairly priced.

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