CSU Stock Sunk 5% After Reporting Slower Growth In Q1 2025

Constellation Software CSU just reported Q1 earnings, delivering 13% revenue growth and 14% free cash flow (FCF) per share growth compared to a year ago. These are good growth rates but considerably slower compared to the usual 20% annual growth rate the company delivered over the past few years. The question now is whether the company still deserves the 48 price to FCF ratio the company is currently trading at.

On the table above, you will find the historical growth rate of CSU for the past 10 years. Notice that the growth rate of revenue fluctuates up and down every few years between 10% to 39%, which makes sense considering the majority of the growth comes from business acquisitions, and good deals don’t always come around in an orderly manner, which will result in inconsistent return on invested capital. But overall, the management has done a fantastic job growing the business at an average of 17.5% per year.

In this quarter, CSU spent $110 million acquiring new private businesses, significantly lower than the $299 million a year ago (shown in the figure below). In addition, the company spent $174 million to purchase common shares of a Poland company, Asseco, which develops software primarily for the banks and finance industries. I think this is a great deal, as CSU only paid 85 PLN per share for Asseco at a PE ratio of 10 and Asseco has been growing its EPS 7% CAGR for the past 5 years. The stock has appreciated significantly to 171 PLN since CSU’s purchase. This is one of the reasons why CSU’s revenue growth slowed down this quarter because the purchase of public shares does not increase CSU’s reported revenue. In total, CSU spent about the same amount for acquisitions compared to last year.

Overall, I believe the management is still able to find plenty of great vertical software businesses to acquire and given the track record, the slow down in Q1 does not reflect any deterioration of CSU’s business model. The estimated value per share of CSU is CA$5,299.34, indicating a CAGR of 11.5% in the next 5 years. Here are the assumptions used in the DCF calculation:

• Latest TTM FCF CA$2.14 Billion
• FCF growth rate of 15% (5YR AVG 21.9%)
• 0% Share dilution (5YR AVG 0%)
• Future Price/FCF ratio of 30 (5YR AVG 40.1)
• Discount rate of 10%

CSU is currently trading at a fair price and I will continue holding the stock for the long-term.

You can also see all my past CSU stock analysis using this link.

Holdings Disclosure

• SoloFIRE CSU ownership: 6% of portfolio
• SoloFIRE CSU Average Cost Paid: CA$3,083.26
• Holding time: 3 years

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DISCLAIMER: Solofire is not a registered financial advisor. This post contains author's personal opinion only and it should NOT be considered financial advice.