Investors in Constellation Software Inc. (TSE:CSU) had a good week, as its shares rose 7.7% to close at CA$1,465 following the release of its quarterly results. It looks like a credible result overall - although revenues of US$953m were what the analysts expected, Constellation Software surprised by delivering a (statutory) profit of US$3.91 per share, an impressive 38% above what was forecast. This is an important time for investors, as they can track a company's performance in its report, look at what experts are forecasting for next year, and see if there has been any change to expectations for the business. So we collected the latest post-earnings statutory consensus estimates to see what could be in store for next year.
After the latest results, the eight analysts covering Constellation Software are now predicting revenues of US$4.01b in 2020. If met, this would reflect a decent 11% improvement in sales compared to the last 12 months. Per-share earnings are expected to soar 21% to US$18.76. Yet prior to the latest earnings, the analysts had been anticipated revenues of US$4.03b and earnings per share (EPS) of US$14.22 in 2020. There was no real change to the revenue estimates, but the analysts do seem more bullish on earnings, given the great increase in earnings per share expectations following these results.
The consensus price target was unchanged at US$1,134, implying that the improved earnings outlook is not expected to have a long term impact on value creation for shareholders. That's not the only conclusion we can draw from this data however, as some investors also like to consider the spread in estimates when evaluating analyst price targets. Currently, the most bullish analyst values Constellation Software at US$1,255 per share, while the most bearish prices it at US$1,005. This is a very narrow spread of estimates, implying either that Constellation Software is an easy company to value, or - more likely - the analysts are relying heavily on some key assumptions.
Another way we can view these estimates is in the context of the bigger picture, such as how the forecasts stack up against past performance, and whether forecasts are more or less bullish relative to other companies in the industry. It's pretty clear that there is an expectation that Constellation Software's revenue growth will slow down substantially, with revenues next year expected to grow 11%, compared to a historical growth rate of 16% over the past five years. By way of comparison, the other companies in this industry with analyst coverage are forecast to grow their revenue at 14% per year. Factoring in the forecast slowdown in growth, it seems obvious that Constellation Software is also expected to grow slower than other industry participants.
The Bottom Line
The biggest takeaway for us is the consensus earnings per share upgrade, which suggests a clear improvement in sentiment around Constellation Software's earnings potential next year. On the plus side, there were no major changes to revenue estimates; although forecasts imply revenues will perform worse than the wider industry. There was no real change to the consensus price target, suggesting that the intrinsic value of the business has not undergone any major changes with the latest estimates.
With that in mind, we wouldn't be too quick to come to a conclusion on Constellation Software. Long-term earnings power is much more important than next year's profits. We have forecasts for Constellation Software going out to 2022, and you can see them free on our platform here.
Plus, you should also learn about the 2 warning signs we've spotted with Constellation Software .
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