Constellation Software is updated and rated Weak Sell at $491.30.
There is no doubt that this is a great company and one of the very best managed Canadian companies. Nevertheless, the stock may now be too expensive in relation to earnings. For the next few quarters its reported earnings, which are in U.S.dollars, will be lowered (but will still almost certainly show an increase) by the recent sharp increase in the U.S. dollar. In addition its new debentures will noticeably increase its interest costs. This already started in Q4 but they are set to triple the size of the debenture on September 30. The annual interest will be about $25 million Canadian. This is not huge given its adjusted earnings of U.S. $274 million in 2014 and also given that the $25 million in interest will be partially offset by savings on the former short-term bank debt. Still it would appear to be somewhat of a drag on earnings growth.
As for the debentures, they are ostensibly attractive paying currently a yield of about 7% based on the $122 debenture trading price. And the fact that the interest rate will float up if inflation rises (The rate is 6.5% on $100 plus or minus CPI adjusted April 1 each year). Offsetting this attractive rate is the fact that the company can call in the debentures at $100 although only on five years notice. They are also allowed to call in part of the debentures. At the moment calling them in seems unlikely. But it’s hard to say what the company might decide in another year or two. On balance, the debentures at $122 are probably reasonably attractive.
As for the rights; 10.6 rights give you the ability to purchase $100 of debentures for $115. The rights were recently trading at 51 to 65 cents. That would mean you could buy the debentures for $120.40 to $121.90. I am not sure that this attractive given that the new debentures will not issue until September 30 and it would seem that interest would not accrue until then. On that basis I would sell the rights if I owned any and if I wanted the debentures I would buy on the market. When you buy bonds they are normally adjusted for accrued interest but I don’t believe that is the case for these exchanged traded debentures.