Reassessing Constellation Software (TSX:CSU) Valuation After Founder CEO Mark Leonard’s Sudden Resignation

Constellation Software (TSX:CSU) is back in focus after founder Mark Leonard abruptly resigned as CEO for health reasons, with long time insider Mark Miller stepping in as President and joining the board.

See our latest analysis for Constellation Software.

The leadership news lands after a difficult stretch, with the 90 day share price return down sharply and the 1 year total shareholder return negative, even though 3 and 5 year total shareholder returns still show strong compounding. This suggests long term momentum rather than a broken story.

If this management transition has you rethinking your software exposure, it could be a good moment to scout other specialised fast growing stocks with high insider ownership that might fit your strategy.

With the share price down heavily over the past year despite solid long term growth and analysts still seeing upside, is Constellation Software slipping into bargain territory, or is the market correctly pricing its next chapter?

Price-to-Earnings of 74.4x: Is it justified?

At CA$3341.58, Constellation Software trades on a steep 74.4x price to earnings ratio, pointing to an expensive valuation relative to peers.

The price to earnings multiple compares the company’s share price to its current earnings. It is a quick gauge of how much investors are paying for each dollar of profit.

For a mature but still growing software consolidator like Constellation, such a rich multiple suggests the market is pricing in strong future profit growth, rather than simply rewarding recent results.

That optimism stands out when placed alongside its benchmarks. Constellation’s 74.4x multiple is well above both the Canadian Software peer average of 58.4x and the broader Canadian Software industry on 52.3x. It also exceeds an estimated fair price to earnings ratio of 41.3x, implying a level the multiple could revert toward if expectations cool.

Explore the SWS fair ratio for Constellation Software

Result: Price-to-Earnings of 74.4x (OVERVALUED)

However, leadership uncertainty and any slowdown in acquisition-driven growth could challenge the lofty valuation and trigger a sharper reassessment from investors.

Find out about the key risks to this Constellation Software narrative.

Another View: DCF Points to Deep Value

Our DCF model tells a very different story. With an estimated fair value of around CA$5,821 per share compared to today’s CA$3,342 price, Constellation looks roughly 43% undervalued. If the cash flows materialise as expected, is the market underestimating its resilience?

Look into how the SWS DCF model arrives at its fair value.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Constellation Software for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 903 undervalued stocks based on their cash flows. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Build Your Own Constellation Software Narrative

If you think the numbers tell a different story, or prefer digging into the details yourself, you can build a tailored view in minutes: Do it your way.

A great starting point for your Constellation Software research is our analysis highlighting 4 key rewards and 3 important warning signs that could impact your investment decision.

Ready to uncover more opportunities?

Before you move on, use the Simply Wall St Screener to uncover fresh stock ideas tailored to your strategy, so you are never relying on just one story.

• Capture tomorrow’s breakthroughs by scanning these 27 AI penny stocks that are building real-world products on top of transformative AI technology.
• Secure more defensive income streams by filtering for these 15 dividend stocks with yields > 3% that can potentially support returns even when markets turn choppy.
• Position yourself early in emerging themes by reviewing these 80 cryptocurrency and blockchain stocks shaping the infrastructure behind digital assets and blockchain adoption.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com