Canada’s Warren Buffett, Mark Leonard’s Constellation Software 3

Q3 financial statements of one of my favorite companies is out. My favorite company and its very well deserving sexy man Mark Leonard… 

If you have been following my journey then you can guess who my top 3 sexiest Canadians are by now….

1st Stanley Ma from MTY Food Group

2nd Pierre-Paul Lassonde from Lassonde Industries

3rd Mark Leonard from Constellation Software

in no particular order. I just love all three of them and personally have huge respect for each man.

Anyway, Constellation Software Just released its Q3 earnings an hour ago. It is my favorite time of the day… Beer on my right hand and freshly printed FS and MD&A on my left hand. After 2 beers, I finished reading it.

4000% during last 10 years…. Isn’t it just insane?

For those who do not know what Constellation Software and who Mark Leonard is Globe and Mail put a quite good article about him 4 years ago so give it a read.  

How did they do?

Good in general… They did not just sit back and did nothing. I can easily feel that they worked their ass off on their acquisition strategies while relatively minimizing related expenses. Mark, CEO, is quite frugal and I can’t appreciate enough his superior management skills combined with corporate stewardship.

He is a very private man. I don’t think there is any pictures of him in the internet anywhere so send it to me if you happen to have the link. 🙂

(December 3 2017 Update)- Here is the picture of Mark Leonard I found…

If you run into him while walking on downtown Toronto, shake his hands. He is your lucky charm.

Things that I love about Constellation Software?

• Mark Leonard- frugal CEO, intelligent, honest, shareholder friendly, high ownership, he thinks and act like an owner. he is shy and very private, his actions are louder than his words, his salary has been $1 for last several years, #1 capital allocator in Canada and I think top 5 in North America
• One of the highest, if not highest, performing TSX stocks in Canadian history
• They don’t issue options (Most thieves do…) and executive bonus is paid in cash locked up in trust account to be used to purchase publicly traded shares (just like us)
• No share issuance for many years
• Revenue, net income and free cash flow growers
• Prudent acquisition track records. Many hundred acquisitions so far
• Super high ROIC- Average around 30%!!!!!!!! Insanely effective and efficient company
• Mark’s insightful Buffett like letter
• Only downside is its crazy valuation. It is currently traded at around 50 times earnings…. Haha oh well.. Quality matters!

Q3 highlights

• Revenue grew 17% (4% organic growth, 2% after adjusting for changes in foreign exchange rates) to $637 million compared to $546 million in Q3 2016. (Pretty good!)
• Adjusted EBITA increased $21 million or 15% to $162 million as compared to $140 million in Q3 2016.  (Solid!)
• Net income decreased 20% to $54 million ($2.56 on a diluted per share basis) from $68 million ($3.18 on a diluted per share basis) in Q3 2016. (Awful!)
• Adjusted net income declined 4% to $116 million ($5.45 on a diluted per share basis) from $121 million ($5.70 on a diluted per share basis) in Q3 2016.  Excluding the impact of unrealized foreign exchange (gains) and losses recorded in Q3 2017 and Q3 2016 Adjusted net income increased 3% to $123 million ($5.81 on a diluted per share basis) from $120 million ($5.65 on a diluted per share basis) in Q3 2016. (Not bad)
• Fourteen acquisitions were completed for aggregate cash consideration of $52 million (which includes acquired cash).  Deferred payments associated with these acquisitions have an estimated value of $12 million. (Amazing!)
• Cash flows from operations were $123 million, a decrease of 11%, or $15 million, compared to $138 million for the comparable period in 2016. (Bad!)
• Subsequent to September 30, 2017, the Company entered into agreements to acquire seven entities for aggregate cash consideration of $41 million on closing plus cash holdbacks of $9 million for total consideration of $50 million (Solid!)

To conclude, the results are quite disappointing… Everything was ok except net income decrease which I do not really mind. Since I have not had a chance to build my full position (at least 12-13% of my portfolio value?) on Constellation Software yet, I hope that the markets perceive the decreased net income very negatively and sell off so that I can build full position.

I don’t care whether the symbol looks like 70’s retro as long as its company makes 1000000000000000000% more money than many tech companies with most futuristic looking symbols, good looking websites and hipster office.

Quite substantial portion of my portfolio is allocated to Constellation Software which is quite substantial. I really don’t know what markets are going to do tomorrow but I really hope the price goes down. Isn’t it irony? I just want more pieces of Constellation Software at cheaper price. Even if my current market price of the shares that I already own would drop by 15% or even 50% or more, I would be super excited to buy more of this one of the best companies ever existed in Canada.

As you know, I love owning very concentrated portfolio. My top 10 holding accounts for about 75% of my entire portfolio. I like owning every one of them and am relatively more confident about my 10 top picks. Hopefully I can have a chance to use up my available cash on hands tomorrow and days after that buying up this beauty. If price drop does not happen then I will wait for the right moment but I really think that price drop is likely. For typical companies, the results are pretty handsome but considering its crazy valuation, results do not look so good.

As always, do your own research before buying any stocks…

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