2021 Performance
Constellation performed extremely well as a stock in 2021 with the spin of Topicus and the stock price appreciation. Better yet, the company continues to to put record amount of its growing cash flows to work with acquisitions that continue to focus on small businesses… until recently… more on that below.
I recently added to my position, despite it already being my biggest holding.
2022 Acquisitions
The first few months of the year, the company was on pace to continue with its acquisitions from the record breaking 2021 year. Then, something kind of crazy happened. They announced the acquisition of Allscripts Hospitals and Large Physician Practices Business Segment for 700 million. The price tag was around 0.75x sales which is low for such a sizeable acquisition. The financials for the segment are a little fuzzy but the sellers conference call mentions it expects the segment to account for 50-60 million in FCF so Constellation is getting it for ~14x FCF. If they are able to make some modest improvements, this could be a good return over a few years.
To put it into context, this single purchase was not only the biggest purchase ever, it also beat out every prior years annual purchases except for 2021!
For most businesses this would be shocking news and a dramatic change of strategy. And with Constellation it might appear to be. But in reality this is exactly what Mark Leonard told investors was going to happen in the 2021 President’s Letter to shareholders. Good management teams do what they say they are going to do. In this case this is a clearly defined way for the business to maximize its reinvestment rates as the cash flows continue to grow. The ROIC will come down because of this but the overall cash flow growth to shareholders will be better compared to paying out dividends.
Topicus Update $TOI.V
In February the preferred shares of Topicus were fully converted. This was fully expected for a long time so no real news. Constellation continues to be a long term holder and I own Topicus as well (the baby European brother).
The stock price for Topicus well off it’s highs but it’s probably for the best as it was likely getting ahead of itself. You can likely blame the crash in high growth tech names if you want an excuse for the fall from grace but the reality is that the underlying business continues to perform and the current price seems a bit more “reasonable”.
Pinetree Capital
On a related note, Pinetree Capital which is a tiny business run by Mark Leonard’s son Damien, is in some ways replicating some of Constellation’s ways and is an interesting one to check out. Here’s an tweet with some information to get your teeth wet (I’m bad at mixing up sayings).
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