Shares of Constellation Software program (TSX:CSU) are sliding after information that long-time CEO Mark Leonard is stepping down attributable to well being points, alongside investor worries about synthetic intelligence (AI) disrupting the corporate’s mannequin.

I don’t purchase it. Mark isn’t Constellation, and Constellation isn’t Mark. As nice a frontrunner as he’s, the enterprise is much larger than one particular person, and the AI fears are overblown. If something, what’s actually occurring is CSU’s a number of is coming down as traders are reminded that even the most effective corporations will be too costly for those who pay any worth for his or her earnings.

At simply over $4,000 per share, CSU now trades at round 24 occasions ahead earnings. That’s not filth low-cost, however for this enterprise, it’s a uncommon likelihood to purchase an exquisite firm at a good worth, and that’s ok.

What’s CSU?

Constellation Software program has a novel mannequin. As a substitute of constructing one large product, it acquires and operates a whole lot of smaller, specialised software program corporations. These models promote vertically built-in software program, that are area of interest functions tailor-made to industries like healthcare, schooling, or municipal providers.

As soon as in place, the merchandise are mission-critical, which suggests prospects not often change. This results in sticky recurring income, low churn, and a enterprise mannequin that hums quietly within the background with excessive predictability.

Constellation’s energy lies in decentralization. Enterprise models function independently, with minimal interference from headquarters, however profit from shared assets and capital-allocation experience. That construction permits it to purchase, combine, and scale software program companies extra effectively than opponents.

How good is CSU?

One metric says all of it: return on fairness (ROE). Over the trailing 12 months, Constellation has posted an ROE of twenty-two.22%.

ROE measures how effectively an organization turns shareholder fairness into income. It’s a favorite of Warren Buffett as a result of it’s troublesome to govern and divulges the true high quality of a enterprise.

Constellation achieves this excessive ROE due to its sticky software program mannequin. By proudly owning vertical-market software program companies that prospects can’t simply substitute, it generates sturdy income while not having to consistently reinvest large sums in flashy progress initiatives.

That consistency, paired with disciplined capital allocation, is why CSU continues to face out as one of many best-run corporations on the TSX even after latest stumbles.

The Silly takeaway

When others are fearful, that’s when the most effective alternatives seem. The Mark Leonard transition and overblown AI disruption fears have created simply such a second for CSU. For long-term traders, this dip is an opportunity to personal a world-class Canadian tech inventory at a extra beneficial worth than in earlier years.