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What are we looking for?

Valuations for 10 Canadian-listed application software companies.

The screen

Application (as opposed to system) software is a broad category that includes software for the masses as well as specific applications that meet specialized needs of industrial or professional clients. Software firms in this category tend to channel cash flow back into growth instead of dividends.

Is there still value to be found among Canada’s leading players after last year’s runup in prices? We used StockCalc’s screener to select the 10 largest application software companies on the Toronto Stock Exchange and TSX Venture Exchange. We then used StockCalc’s valuation tools to calculate the fundamental (or intrinsic) valuation for each stock to see whether it is undervalued or overvalued compared with its price.

Overview of the techniques used:

  • Discounted cash flow (DCF value) is a valuation technique in which cash flow projections are discounted back to the present to calculate value per share;
  • A price comparables (price comps) technique values the company on the basis of ratios from selected comparable companies;
  • An adjusted book value (ABV) is calculated by multiplying book value per share by its historical price-to-book ratio.

If we have analyst coverage, we look at the consensus target price.

More about StockCalc

StockCalc is a fundamental valuation platform with tools to calculate and report on value per share for thousands of public companies listed on major North American stock exchanges. StockCalc also contains numerous tools to understand what the stocks you are investing in are worth. Globe Unlimited subscribers can subscribe to StockCalc using the promo code Globe30.

What we found

You can see in the accompanying table the percentage difference between each stock’s recent closing price and its intrinsic value. The “StockCalc Valuation” column is a weighted calculation derived from our models and analyst target data.

Analyst consensus estimates are higher than our models for a number of the firms in this group primarily because the analysts have higher growth rates projected.

All of these companies’ stock prices are within 20 per cent of all-time highs; eight are within 10 per cent of their previous peaks. With all of that, our models are showing most of this group as fully valued to overvalued at this time.

Seeking value among Canada’s leading software companies

CompanyTickerMkt. Cap. ($ Mil.)Recent Close ($)StockCalc Val. ($)Diff. (%)DCF Value ($)Price Comps ($)ABV ($)Analyst Tgt. ($)1Y Rtn. (%)Div. Yld. (%)
Shopify Inc.SHOP-T179,469.51,643.851,543.55-6.1100.87113.22947.701,873.31160.0n/a
Constellation SoftwareCSU-T33,745.81,592.431,795.7312.81,833.182,477.381,394.782,213.2118.40.3
Ceridian HCM HoldingCDAY-T18,343.2130.00126.42-2.80.0090.50123.05127.5132.8n/a
Open Text Corp.OTEX-T16,146.362.2466.506.858.1086.1353.2985.042.51.6
Lightspeed POS Inc.LSPD-T10,596.192.48103.2411.617.2299.76200.51113.23109.0n/a
Descartes Systems Grp.DSG-T6,670.280.4171.43-11.231.0657.8455.51100.9432.4n/a
Kinaxis Inc.KXS-T4,920.4186.22184.08-1.141.26141.85161.86314.3861.4n/a
Facedrive Inc.FD-X3,449.949.0032.68-33.3-1.4121.6812.63n/a1,496.1n/a
Enghouse Systems Ltd.ENGH-T3,423.760.7061.521.456.0574.7251.5479.2016.40.9
Docebo Inc.DCBO-T2,112.071.1964.48-9.42.1818.7365.47101.85329.6n/a

Source: StockCalc

Let’s look at a couple of these companies:

Constellation Software Inc. is a global firm that offers custom software and development for public, private and government clients. Growth has been driven by acquisition (more than 500 companies acquired to date). Constellation Software’s stock price has performed exceptionally well over the past decade, having seen a 40-per-cent compound annual growth rate (CAGR) over that period. Both our models and analyst consensus see further upside for Constellation.

With all of us in some form of restriction because of the pandemic, logistics companies such as Descartes Systems Group Inc. have their technology working behind the scenes to ensure the supply chain keeps moving. The company’s Global Logistics Network is a software service that allows users to communicate with one another, have product visibility throughout the supply chain and analytics on costs and volumes. Descartes had a 27-per-cent CAGR in its stock price over the past decade, including 32-per-cent growth last year. The analyst consensus target is currently about $101, whereas our DCF, comparables and adjusted book are well below Descartes’s recent price of $80.41. As noted previously, firms such as these are very sensitive to forward growth projections.

Investing involves risk. StockCalc accepts no liability whatsoever for any loss or damage arising from the use of this analysis.

Brian Donovan, CBV, is the president of StockCalc, a Canadian fintech based in Miramichi, N.B.

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