Matco clients are aware that our proprietary M-Factor process leads us to own companies that are compounders of capital over time, have a strong balance sheet, usually pay a dividend and most importantly are reasonably priced relative to expected earnings growth. In this Insight, we would like to highlight one of the technology companies in our Canadian Equity Income Fund, Constellation Software Inc. (CSI), which has a current market capitalization of approximately $46 billion. Our M-Factor model identified CSI as a buy in March 2012 at a price of $99 compared to its current price of $2,200.


CSI started in 1995 and acquires, manages, and builds leading vertical market software for mission-critical solutions in over 100 sub-industries globally. The company has over 25,000 employees and serves over 125,000 customers. For the year ending December 2020, annual revenues were US$4 billion with 71% coming from recurring Maintenance contracts, 19% from Professional services, 6% from Licenses and 4% from Hardware. CSI has successfully acquired and integrated over 500 software businesses over the last 26 years.

Why We Still Own It

Our M-Factor process looks at the company through five financial lenses.

  1. Quality defined as Return on Equity – is the company consistently generating more cash than it needs so it can reinvest in the future or undertake acquisitions to grow?
    CSI has consistently generated excess free flow cash-flow which it has used for acquisitions. This free cash flow has been generated by two factors: first not overpaying for acquisitions; second providing the resources for these new companies to further leverage their businesses thereby generating additional free cash flow.
  2. Value defined as Price to Earnings – is the company trading at a reasonable valuation relative to their peer group and expected earnings? CSI has traded at a lower valuation than other Canadian technology companies, given its lower earnings growth, however, its earnings have been more consistent over time given its recurring revenue and business model.
  3. Growth defined as Earnings Growth – is the company able to grow during good and tough times? CSI has had positive earnings through recessionary periods and has been able to buy firms during economic downturns taking advantage of pricing dislocations. Its recurring revenue model provides consistent earnings during uncertain times.
  4. Income defined as Dividend Yield – is the company paying a consistent and sustainable dividend?
    CSI become a publicly-traded company in 2006 and has paid a regular dividend since 2007. Additionally, in recent years, it has paid a special dividend. The company recently stated that it will stop its special dividend and instead reinvest this excess cash into larger acquisitions as they believe they can generate a higher rate of return for shareholders.
  5. Risk defined as Volatility – is the stock more volatile than the overall Canadian stock market index?
    CSI has a 20% lower volatility than the stock market index on a 5-year basis. This means that the stock will fall less than the overall stock market during corrections.

The Bottom Line

Creating wealth in the stock market is about buying businesses at the right price that have the potential to grow over the long term. Given investors are constantly bombarded with conflicting investing news, the challenge for investors is two-fold. First, have a consistent investment process (at Matco this is our M-Factor process) that identifies great businesses priced right. Second, be patient with your investment thesis which will take time to work out, rather than focusing on the day-to-day price of a stock.

One of the greatest investors of all time is Warren Buffet, who focused on buying great private and public businesses focused on the long-term compounding value of the business, not short-term daily stock market gyrations.

Not sure if you own great businesses in your portfolio?

Please call or email me for a no-commitment review of your portfolio. We will stress test your portfolio through our M-Factor process and provide you with an action plan.

Anil Tahiliani

Anil Tahiliani, MBA, CFA
Portfolio Manager, Canadian Equities

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