COMPOUNDING BEAST - Constellation Software CSU.TO (CNSFW)

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Today’s company is Constellation Software which is a Canadian based company that was once a small cap stock that will most likely be a 100 bagger. I want to analyse this to see if I can learn to find a similar company but earlier in its life.

Industry

Any of you who have followed me for a while, will know how much I love recurring revenue businesses. Constellation Software owns 100’s of these types of businesses. All in the software world, so the margins are extremely high.

Just to reassure you how good this company is, legendary investors Chuck Akre at Akre Capital Management is the second largest shareholder plus another legendary investment firm Ruane, Cunniff and Goldfarb are a big shareholder as well.

Competition

Future growth is the issue the company is facing. They are making a lot of free cash flow. This is fantastic, but they are running out of good investment ideas.
The company has spent decades acquiring and nurturing small software businesses, but the competition to buy these businesses is fierce now.

Constellation software has a lot of copy cats and this has made the ability to buy small software companies more difficult.

Expanding geographically is working, and they recently spun out Topicus, which plans to do the same thing as Constellation achieved 10 years ago but in europe.
Constellation still owns the majority of Topicus and the free cash flow returns back to Constellation, so investing in Constellation is still better at the moment than Topicus in my opinion.

Management

Mark Leonard is the Founder and CEO. Do yourself a favor and go to the Constellation software website and read his president letters.

I love his integrity and how he looks at real numbers and metrics to measure the performance of his business. He is the type of leader I want to invest with.

Opinion

So the negatives are.
Can the growth continue? This is the big question. I don’t know, but the management team and Mark might surprise us all. I bet this is exactly what he is wanting to do. And I wouldn’t bet against him.
Market Cap is already too big. Unlikely to be a 100 bagger from here.

But there are so many positives,
Great industry. I am a big fan of software businesses. And having a suite of hundreds of them, makes a great business.
Some of the best, stable financials I have ever looked at.
One of the best capital allocators and Owners I have ever studied.
Spin off’s are starting to happen and shareholders get part of these.
At least 2 Super investors are invested