No. of Recommendations: 4
UBS analyst Kevin McVeighs comments after earnings report.
Constellation has been a terrific capital allocator over time. When you think about that average revenue growth of roughly 21 to 25 per cent, the majority of that has been inorganic at about 20 per cent, and then the organic contribution around five per cent. They’ve been a very efficient capital allocator.
If you look at Constellation today, the stock is implying about 6.5 per cent longer-term growth. That compares with what they’ve historically delivered, which is roughly 15 to 20 per cent longer-term growth.
The level of fear and disruption in the stock is really at levels we haven’t seen.
One other subtle but important point with Constellation is they don’t have stock-based compensation. If you look at most software companies, about 1,500 basis points of EBITDA add-backs are stock-based compensation.
If you factor that in, the valuation looks that much more compelling because it’s a very clean EBITDA and very clean free cash flow story that should be able to take advantage of some of the opportunities the market is presenting right now.
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