For some time now, I’ve been working on developing an AI bot that utilizes our book and my other work to help me quickly assess a stock that I may add to my list. 

It has saved me countless hours of analysis and has helped me achieve some impressive gains. 

For fun, I thought I’d share the analysis done today on Constellation Software, a company I’ve been watching for a long time. Recent announcements have resulted in the stock dropping significantly, so my question to the bot was, using my analysis, should I buy?

The bot is not always accurate, so I take the analysis as a starting point and add common sense and other filters, such as what my gut tells me. You need to do the same.

So, for fun, here is the analysis. Additionally, I wonder if you would like access to a bot if we create one, so you can utilize the tools yourself for whatever you are looking at? Please let me know your thoughts via email. Bee well and here it is. Hank [email protected]

Constellation Software (TSX: CSU) — Full Svec Analysis (Updated with Recent & Past Financials)

Date: September 29, 2025
Prepared for: Henry J. Svec

Executive Summary

Constellation Software remains a world‑class vertical‑market software (VMS) compounder with robust recurring revenue and a disciplined acquisition engine. However, using the latest Q2 2025 results, earnings volatility (notably a sharp drop in net income) and higher net debt accentuate valuation risk. Under Svec metrics (cash‑flow yield, P/B, debt prudence), the business quality scores highly but the stock’s current pricing implies a very low cash‑flow yield. A strict Graham/Svec approach suggests ‘Watch/Avoid for new capital’ pending a better entry. For holders, the thesis rests on continued cash‑flow compounding and disciplined capital allocation under leadership transition.

Latest Price & Notable Events

• Share price (Sep 26, 2025 close): ~C$3,660 per share (post‑announcement decline following Mark Leonard stepping down as President).

• Leadership update (Sept 26, 2025): Founder Mark Leonard stepped down as President for health reasons; remains on the Board. Mark Miller named successor.

Key Recent Financials (Q2 / 1H 2025, USD)

Selected Past Financials (FY 2024, USD)

Townsend’s 5 Growth Factors (2019 → 2024 CAGRs)

Svec 10 Rules — Scores (0–10) with Notes

1) Hive Must Come First: 8/10 — Decentralized capital allocation; engine intact, though leadership transition adds risk.

2) Nature Knows Best (durability/simplicity): 9/10 — Mission‑critical VMS; sticky maintenance revenue.

3) Recycle (avoid dilution/leverage prudence): 7/10 — No dilution; leverage rising; rates/size of deals require caution.

4) Focus, specialize, be efficient: 8/10 — Strong OCF; digestion of larger platforms can weigh near‑term ROIC.

5) Right Place (moats/geography): 8/10 — Global, niche moats with high switching costs.

6) Little Things Compound: 10/10 — Hundreds of small acquisitions compounding for decades.

7) Fight Only When Needed: 8/10 — Disciplined bidding; localized setbacks contained.

8) Probability of Success (industry soundness): 9/10 — Resilient VMS end‑markets, diversified exposure.

9) Constant Feedback (governance/leadership): 8/10 — Elite allocators; minor cut for succession uncertainty.

10) Listen to the Buzz (sentiment): 6/10 — Premium beloved name; sentiment fragile with leadership news and valuation stresses.

Bonus 11) Delisting Risk: 10/10 — Large cap, TSX‑60, negligible delisting risk.

Key Svec Metrics (Today)

• Price‑to‑Book (indicative): ~14–17x (rich by value standards).
• Svec Cap Rate (FCFA2S ÷ Price):
 – Conservative (Q2 annualized FCFA2S ≈ US$880M): ~1.6% yield at current pricing.
 – Mid (1H annualized FCFA2S ≈ US$1.46B): ~2.6% yield.
• Share count: stable (~21.19M); buybacks not material historically.
• Dividend: small recurring base plus occasional specials; comfortably covered by cash flows.

Basement Price — Methodology & Scenarios

Definition (per Svec approach): the ‘basement price’ is the per‑share level at which free cash flow available to shareholders (FCFA2S) delivers a target cash‑flow yield (Svec Cap Rate). We solve: Price = FCFA2S_run_rate ÷ Target_Yield. We present a range based on two run‑rate assumptions and two yield hurdles.

Interpretation: Even under a generous run‑rate (1H annualized) and a lighter 8% hurdle, the ‘basement’ approximates C$1,200 per share—well below the current ~C$3,660 price. At a stricter 10% hurdle using Q2 annualized FCFA2S, the basement is roughly C$580 per share.

AI Risk / Opportunity

Risk: AI could reduce software development costs and invite niche competitors in certain verticals, pressuring pricing for ancillary modules. Opportunity: CSU’s moat stems from installed base, mission‑critical workflows, and switching costs; AI is more likely to enhance internal productivity (support, code review, underwriting) and add customer‑facing features across the portfolio. Net: Moderate risk, moderate‑high opportunity if execution stays disciplined.

Six Gardiner‑Style Factors (Applied)

1) Balance Sheet Strength — Mixed: ample cash generation but higher net debt.
2) Recurring Revenue — Strong: high maintenance/recurring mix.
3) ROIC Discipline — Good historically; watch amortization/interest drag with larger platforms.
4) Growth Runway — Still broad across VMS niches globally.
5) Capital Allocation — World‑class history; succession will be tested.
6) Valuation — Demanding; a ‘fail’ for new buys under value discipline.

Verdict

Business Quality: Excellent (Rules‑weighted ≈ 8–9/10). Investment Case at Today’s Price: Cautious.
The gap between current price and ‘basement’ is wide. For new capital, prefer patience for a higher cash‑flow yield or lower P/B. For holders, maintain only if you accept lower forward IRRs and trust management to preserve discipline post‑transition.

References (Sources)

• Q2 2025 Press Release (Aug 8, 2025): FCFA2S Q2=US$220M; 1H=US$730M; dividend declared US$1.00.

• Q2 2025 MD&A (Aug 8, 2025): shares outstanding 21,191,530; cash/debt balances; organic growth.

• Q4 2024 Shareholder Report / Financials: FY24 revenue US$10.07B; NI US$731M; EPS US$34.48; FCFA2S US$1.472B.

• Stock price history (Sep 26, 2025 close ≈ C$3,660).

• USDCAD ~1.394 on Sep 26–29, 2025 (bank/market data).

• Leadership update (Sep 26, 2025): Mark Leonard steps down as President; remains on Board.