Great Article. Regarding AI, it means that more problems are now profitably solvable using software. Therefore, Constellation should see more opportunities to extend the value proposition of each of their businesses. Re bonds, Despite the academic theory that they are less risky than stocks, that only holds up over relatively short periods. For the long run they are actually more risky due to inflation and interest rate risk. Have a look at Roper, they are similar to Constellation, in fact Mark Leonard used them as a benchmark in one of his letters
Hi Trevor, great piece and fully agree with all points. I think the 6.2% yield is misleading though as based on their LTM Q1-26 FCFA2S, it's closer to 4.3%?
I disagree, there's too much noise with working capital especially as acquisitions ramp this year. Adjusted net income is by far the better measure. This is what the CFO said on q1.
"The way we bonus ourselves internally is economic net income. It was very close to what we used to have as adjusted net income."
That's what bay st uses for non-gaap consensus too.
2026 adjusted net income consensus is 114.94 usd so $162 or 5.62%.
So yes not perfect but close enough. What you really want to do is take subtract out the market value of topicus and lumine (and their respective earnings from csu) which would be cheaper but this is approximately right here. It's cheap and top 1% compounder with top .1% culture and governance. at a fraction of the market multiple (and antifragile)
I agree, CSU is ridiculously cheap. And the adjusted net income is a valid metric.
I wouldnt say it's 'by far' the best metric to use, though. Just because they use it internally to bonus themselves, doesnt mean it's the closest thing they have to Owner's Earnings.
There is a reason they report FCFA2S in their financial statements and not Adjusted Net Income. FCFA2S is the closest thing they have to Owner's Earnings over a long time period. Unfortunately, though, it is indeed convoluted by WC and IRGA revaluation charges in the short term, which is why it makes sense they use Adjusted Income internally to smooth this out for bonuses.
Either way, I used average Operating Cashflow margins of the last three years and made projections based on revenue in my article.
Agreed, I’ve been focusing more on Topicus and have adjusted their FCFA2S by including their pro-rated look-through earnings of ACP and normalising FCF conversion noise by taking historical average conversion rates. Will be posting my article on it soon 😃 phenomenal opportunities
Ah okay it was based on 2026 numbers that explains the confusion!
Agreed, the discount to other systematic acquirers like Heico, Lifco, Ametek, Lagercrantz etc is ridiculous despite better financials. Generational opportunity to profit from both a substantial re-rating and top-quartile growth whilst we wait ✅
I sold that very soon after purchase, it ran up like 40% from my price. This is what sucks about running a fund. My duty is due to my clients not my substack. Sorry if you took a hit. Honesty I've been moving away from releasing my quarterlies partly for this reason.
Thank you. Not surprised given the silence as compared to your voice on FFH and CSU. Read about your fund several years ago in the Globe and Mail, much success and keep going!
Great Article. Regarding AI, it means that more problems are now profitably solvable using software. Therefore, Constellation should see more opportunities to extend the value proposition of each of their businesses. Re bonds, Despite the academic theory that they are less risky than stocks, that only holds up over relatively short periods. For the long run they are actually more risky due to inflation and interest rate risk. Have a look at Roper, they are similar to Constellation, in fact Mark Leonard used them as a benchmark in one of his letters
Hi Trevor, great piece and fully agree with all points. I think the 6.2% yield is misleading though as based on their LTM Q1-26 FCFA2S, it's closer to 4.3%?
Yeah, noticed this too. FCFA2S should be the preferred metric to use
I disagree, there's too much noise with working capital especially as acquisitions ramp this year. Adjusted net income is by far the better measure. This is what the CFO said on q1.
"The way we bonus ourselves internally is economic net income. It was very close to what we used to have as adjusted net income."
That's what bay st uses for non-gaap consensus too.
But why didnt you then?
koyfin doesn't have that in chart form.
2026 adjusted net income consensus is 114.94 usd so $162 or 5.62%.
So yes not perfect but close enough. What you really want to do is take subtract out the market value of topicus and lumine (and their respective earnings from csu) which would be cheaper but this is approximately right here. It's cheap and top 1% compounder with top .1% culture and governance. at a fraction of the market multiple (and antifragile)
I agree, CSU is ridiculously cheap. And the adjusted net income is a valid metric.
I wouldnt say it's 'by far' the best metric to use, though. Just because they use it internally to bonus themselves, doesnt mean it's the closest thing they have to Owner's Earnings.
There is a reason they report FCFA2S in their financial statements and not Adjusted Net Income. FCFA2S is the closest thing they have to Owner's Earnings over a long time period. Unfortunately, though, it is indeed convoluted by WC and IRGA revaluation charges in the short term, which is why it makes sense they use Adjusted Income internally to smooth this out for bonuses.
Either way, I used average Operating Cashflow margins of the last three years and made projections based on revenue in my article.
Agreed, I’ve been focusing more on Topicus and have adjusted their FCFA2S by including their pro-rated look-through earnings of ACP and normalising FCF conversion noise by taking historical average conversion rates. Will be posting my article on it soon 😃 phenomenal opportunities
Ah okay it was based on 2026 numbers that explains the confusion!
Agreed, the discount to other systematic acquirers like Heico, Lifco, Ametek, Lagercrantz etc is ridiculous despite better financials. Generational opportunity to profit from both a substantial re-rating and top-quartile growth whilst we wait ✅
Mr. Scott, thank you. Would appreciate hearing your current thoughts on BMBL too
I sold that very soon after purchase, it ran up like 40% from my price. This is what sucks about running a fund. My duty is due to my clients not my substack. Sorry if you took a hit. Honesty I've been moving away from releasing my quarterlies partly for this reason.
Thank you. Not surprised given the silence as compared to your voice on FFH and CSU. Read about your fund several years ago in the Globe and Mail, much success and keep going!