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Everyone is selling, the charts are red, but should you panic? Not at all. As a long term investor, my favorite time of the economic cycle is when great stocks sell at an unjustified discount. Today I want to bring to light the market’s darling – Constellation Software Inc.. Looking at its size, financial health and track record, I believe there’s an opportunity with Constellation Software during these volatile times.
Constellation Software Inc., together with its subsidiaries, engages in the development, installation, and customization of software to various markets in the United States, Canada, the United Kingdom, Europe, and internationally. Founded in 1995, and led by CEO Mark Leonard, the company employs 19.00k people and with the company’s market capitalisation at CA$26b, we can put it in the large-cap group. Bear market volatility can have a short-term impact on large, well-established companies, but in the long-run, these businesses are likely to prevail. This is because fundamentally, nothing has changed. A fall in share price is hardly detrimental to its financial health and business operations. So, large-cap stocks are a safe bet to buy more of when the stock market is selling off.
Constellation Software currently has US$323m debt on its books which requires regular servicing. This means it needs to have sufficient cash-on-hand to meet upcoming interest expenses. Constellation Software generates enough earnings to cover its interest payments, more specifically, its interest coverage ratio (EBIT/interest) is 21.47x, which is well-above the minimum requirement of 3x. Furthermore, its operating cash flows amply covers its total debt by over 2x, much higher than the safe minimum of 0.2x. And, a given, its liquidity ratio holds up well with cash and other liquid assets exceeding upcoming liabilities, meaning CSU’s financial strength will continue to let it thrive in a fickle market.
CSU’s year-on-year earnings growth has been positive over the past five years, with an average annual growth rate of 25%, beating the industry growth rate of 23%. It has also returned an ROE of 76% recently, above the industry return of 15%. This consistent market outperformance illustrates a robust track record of delivering strong returns over a number of years, increasing my conviction in Constellation Software as an investment over the long run.
Next Steps:Based on these three factors, CSU makes for a strong long-term investment in the face of a fickle stock market. If you’re a risk averse investor, lining your portfolio with proven companies you’re willing to buy more and more of as the price falls, is a good strategy to build your wealth over the long run. This is the beginning of your research, but before you decide to buy CSU, I highly urge you to understand more about the company, in particular, in these following areas:
- Future Outlook: What are well-informed industry analysts predicting for CSU’s future growth? Take a look at our free research report of analyst consensus for CSU’s outlook.
- Valuation: What is CSU worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether CSU is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.