Constellation Software Inc.

Constellation Software Inc. (TSX: CSU), is engaged in the development, installation, and customization of software. They acquire, manages, and builds vertical market software (VMS) businesses. The Company is catering its services to both segments, the public sector, and the private sector.

Why Should Investors Book Profit?

• Poor Liquidity Profile: In Q2 2021, the company's current ratio was 0.77x compared to the industry median of 1.77x. While its Quick ratio was also on a lower side at 0.76x V/s 1.99x. Both these lower ratios against the industry indicates that the company's short-term obligations are growing faster than its resources to cover them, which is not a good indication.
• Higher Cash Cycle days: The company’s Cash Cycle (Days) is higher compared to the industry, implying the company takes more days to convert its inventory to cash. Currently, its Cash Cycle is at 163.5 days against the industry median of 29.5 days.
• Stretched Valuation: CSU shares are available at an NTM EV/Sales multiple of 6.1x compared to the industry (Technology) median of 4.1x. This implies that the shares are overvalued against the industry. The matrix below reflects that the company is overvalued against the industry on many multiples.

• Increase in Leverage: The company’s debt to equity ratio at the end of June 2021 stood at 1.34x higher than the industry median of 0.22x. Additionally, it’s % LT Debt to Total Capital stood at 42.9% whereas industry median is of 16%. These factors imply higher balance sheet risks.
• Trading near the upper band of the Bollinger Bands®: Recently, the stock witnessed a healthy rally on the daily price chart and has moved close to the upper band of the Bollinger band, indicating the stock is perhaps overbought and due for a price correction or a consolidation. Furthermore, the momentum oscillator RSI (14-Period) is trading at ~80.47 levels, also indicates that the stock is in overbought zone and there is a deep possibility of price consolidation or correction.

Source: REFINITIV, Analysis by Kalkine Group

Valuation Methodology (Illustrative): EV to Sales 

Stock recommendation

The company recently shared its Q2 2021 financial numbers, where it posted healthy growth in its top line and bottom line. But the cash flows from operations decreased by USD 66 million to USD 237 million and free cash flows also fell by USD 46 million to USD 145 million in the reported period. Additionally, the company is facing a poor liquidity profile with lower current ratio and quick ratio against industry, indicating that the company's short-term obligations are growing faster than its resources to cover them, which is not a good indication. Furthermore, the company is trading at overvalued levels compared to the industry along higher debt to equity ratio, even the technical indicators point to a possible price correction or consolidation. As a result, we recommend a “Sell” rating on the stock at the closing price of CAD 2,067.01 on August 16, 2021, based on the above rationale and valuation. 

Canaccord Genuity Group Inc.

Canaccord Genuity Group Inc. (TSX: CF) is a leading independent, full-service financial services firm, with operations in two principal segments of the securities industry: wealth management and capital markets. 

Why Should Investors Book Profit?

• Degraded sequential performance: In Q1 2022, the Company recorded lower revenue at approximately CAD 523.8 million, which decreased approximately 24.3% from CAD 692.3 million in the previous sequential quarter. Even the lower expenses couldn’t support the company to maintain its net income as it fell by 38.3% to CAD 84.7 million compared to CAD 137.1 million in Q4 2021. Cash and cash equivalents stood at CAD 1.4 billion, a decrease of CAD 518.3 million from CAD 1.9 billion in Q4 2021.

• Lower margin profile V/s Industry: In Q1 2022, the Company failed on maintaining its pace and witnessed lower performance across operating matrix against the industry, which exhibits the pressure on company.

• Stretched Valuation: CF shares are available at an NTM Price/Cash Flow multiple of 15.4x compared to an industry (Financials) median of 9.6x. This implies that CF shares are overvalued against the industry.

• Trading above the upper band of the Bollinger Bands®: Recently, the stock witnessed a healthy rally on the daily price chart, and it has moved above the upper band of the Bollinger band, indicating the stock is perhaps overbought and due for a price correction or a consolidation.

      Technical Price Chart, Source: REFINITIV, Analysis by Kalkine

Stock recommendation

The company posted robust results compared on Y-o-Y basis, but on sequential basis the company witnessed a sleep decline in its top line and bottom line, which fell by 24.3% and 38.3%, respectively. Its cash and cash equivalents came down to CAD 1.4 billion from CAD 1.9 billion. Furthermore, the Company failed to keep up with the industry, resulting in worse performance across the operational matrix, indicating the company is under pressure. Moreover, the technical indicator suggests that stock is perhaps overbought and due for a price correction or a consolidation. Therefore, based on the above rationale, we recommend a “Sell” rating on the stock at the closing price of CAD 14.67 on August 16, 2021.

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.