Speedwell Research's Drew Cohen shares thesis on FinTwit favorite, Constellation Software $CSU.TO

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Mar 11, 2024

Speedwell Research's Drew Cohen discusses Constellation Software's unique acquisition strategy, capital allocation decisions, and potential risks like AI. They explore the company's culture, operational synergies, and ownership structures, comparing it to Berkshire Hathaway. The podcast also touches on favorite write-ups and quick thoughts on $RH.

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INSIGHT

They've Shown Ability To Keep Deploying Cash

Constellation has deployed over 100% of free cash flow on acquisitions in recent years by using more debt and accepting slightly lower hurdle rates.
Management shows willingness to scale deal size and adjust capital mix to absorb cash flow.

INSIGHT

Organic Growth Has Picked Up Recently

Organic growth has recently accelerated from ~0–2% to about 5–6% in several quarters.
Shared practices and internal initiatives (e.g., Topicus learnings) may be improving organic growth levers.

INSIGHT

Small Assumption Shifts Move Returns A Lot

Sensitivities give a range of potential returns from roughly 6% to 12% depending on organic growth, deployment rate, and ROIC.
Small changes in deployment or ROIC materially affect long-term shareholder returns.

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Drew Cohen from Speedwell Research, joins the podcast to discuss his thesis on Constellation Software (TSX: CSU), who acquires, manages and builds vertical market software businesses.

For more information about Speedwell Research, please visit: https://speedwellresearch.com/

Speedwell Research profile on Constellation Software: https://speedwellresearch.com/companies/reports/constellation-software/

Chapters:

[0:00] Introduction + Episode sponsor: Tegus

[1:41] Who is Constellation Software and why are they interesting to Drew

[6:05] How $CSU.TO is scaling their business model / competing with private equity

[13:00] Reverse DCF, deploying capital, competing now with other billion dollar software businesses

[21:02] Mark Leonard - is $CSU.TO a jockey bet / capital allocation / sellers

[28:32] $CSU.TO - what takes this company out

[30:57] AI risk?

[32:52] Price increases / TransDigm comparison / competition risk

[40:08] $CSU.TO vs. parking capital at index fund / likelihood of deploying at least 50% of their cash flow over next 10-ish years

[45:07] Operating synergies with 6 verticals? Why not more spin-offs?

[47:07] Additional worry about $CSU.TO - changing incentive system

[51:58] Aside from Berkshire, what are other examples of Constellation-like culture

[54:57] Speedwell's favorite write-ups he's done recently + quick thoughts on $RH

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