Constellation Software vs. Lumine Group: The Software Compounding Duel
Researching Quality Investing Companines Constellation Software vs. Lumine Group Stock Analysis
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Hello, fellow quality investors!
Welcome to another exciting battle at Compound & Fire! In the world of software investment, two Canadian titans stand out: Constellation Software and its spin-off, Lumine Group. Constellation Software, a serial acquirer of vertical market software (VMS) businesses, has built a reputation for compounding value through disciplined acquisitions. Lumine Group, carved out in 2023 with a focus on high-growth software niches, represents a newer, faster-growing entity still finding its footing. With Constellation holding a 61.4% stake in Lumine, an investment in Constellation indirectly supports Lumine’s ascent.
This quick scan pits their financial fortresses against each other to uncover which might better guard your investment castle, though Lumine’s rapid revenue growth (outpacing Constellation in recent years) paired with negative net income (despite positive cash flow) signals a need for a deeper dive to determine the ultimate winner.
Quick Scan Overview: Investment Readiness Scores
My quick scan images below reveal the raw data: revenue growth, margins, ROIC, and balance sheet health. Lets look at the numbers to uncover what sets each apart and whether either earns a place on my watchlist.
Constellation Software: The Acquisition Compounding Machine
For a better picture of the Quick Scan click here. The calculation of the IRS score is available in our Discord app
The metrics showcase a robust financial profile with all key indicators meeting or exceeding benchmarks, except for Goodwill/Total assets at 58.1%, which exceeds the 30% threshold and requires scrutiny. The standout figures are:
Operating Cash Flow/Net Income at 300% (well above 80%)
ROIC at 31.2% (significantly above 15%) - I have adjusted the ROIC for amortization of goodwill and intangibles here
Gross Margin at 88.8% (far above 40%)
All highlighting exceptional cash flow efficiency, capital allocation, and profitability. The Goodwill concern is the primary area to monitor, but it’s good to know that Constellation Software is very prudent in what they pay for an acquisition.
Lumine Group: The High-Growth Challenger
Lumine Group, spun off from Constellation, targets rapid expansion in specialized software markets. Its allure is explosive revenue growth, outpacing Constellation recently, and a net cash position, though net income is still negative, but this is offset by positive cash flow and net income should quickly turn positive. The quick scan suggests potential, but its goodwill reliance warrant caution. It’s all about the quality of the acquired companies and not overpaying for these acquisitions.
For a better picture of the Quick Scan click here. The calculation of the IRS score is available in our Discord app
The metrics indicate a promising yet developing financial profile, with most benchmarks met except for Goodwill/Total assets at 62%. For the net profit margin I toot the last twelve months have adjusted for amortization of goodwill and intangibles to get a lookthrough for their earnings power. Standout figures include Operating Cash Flow, ROIC at 20.1%, and Gross Margin at 48.5%, reflecting growth potential and cost efficiency.
At first glance, the quick scans reveal two serial acquirers with excellent capital allocation. Let’s take a closer look at a few key distinctions.
The Big Picture: Investment Readiness Check
The IRS (Investment Resilience Score) aggregates these metrics into a quick health check. Constellation Software scores a 89.3%, with a minor ding on goodwill but bolstered by strong profitability and cash flow conversion. Lumine Group earns an 86.9%, hampered by lower ROIC, though its asset-light model and growth trajectory keep it competitive. Both pass the quick scan’s protective moat test, but Constellation’s proven compounding machine edges out Lumine’s untested potential.
What’s the Verdict?
Constellation Software emerges as the safer bet for now, leveraging its acquisition expertise and consistent profitability to compound value. Its 61.4% stake in Lumine means investors gain exposure to Lumine’s high-growth promise without fully bearing its risks. Lumine’s faster revenue growth (outpacing Constellation in recent years) is enticing, but its negative net income (despite positive cash flow) suggests it’s still in a high-investment phase. A deeper dive is essential to assess Lumine’s path to profitability and whether its growth can outstrip Constellation’s stability long-term. For now, Constellation’s fortress holds stronger, though Lumine’s ambition could reshape the battlefield with time.
Winner: Constellation Software
But is the market telling a different story? Let’s explore.
Market Reality Check: FCF Yield
Constellation Software (CSU): FCF yield of 2.87%, reflecting a solid cash-generating profile tempered by its premium valuation. Compared to the 10-year U.S. bond yield of 4.2%, this suggests potential overvaluation, though its mature compounding narrative supports the premium for stable investors.
Lumine Group: FCF yield of 1.34%, indicating a lower yield due to its smaller size and ongoing investment phase, despite rapid revenue growth. Against the 4.2% bond yield, this points to significant overvaluation, likely driven by growth expectations rather than current cash flow efficiency.
Analysis: Constellation’s 2.87% yield aligns with its stable, acquisition-driven profile, while Lumine’s 1.34% yield suggests a higher valuation premium, possibly reflecting optimism about future growth despite profitability challenges. The 4.2% bond yield indicates both may be overvalued relative to a risk-free benchmark, with Lumine appearing more stretched. Monitor acquisition pipelines closely, as they may influence target valuations and demand in energy-related VMS segments, shaping this valuation duel’s outcome.
Which of the two Canadian companies aligns with your strategy? Share your thoughts in the comments below or join the debate on my Global Quality Investing Discord.
Join the Quality Edge!
My Quick Scan serves as a starting point to spotlight quality investment candidates. Constellation Software earns a place on my Watchlist for a deep-dive exploration, with Lumine Group as a strong contender to monitor as well. I’m excited to analyze Constellation’s acquisition-driven growth, competitive moat, and compounding potential, while delving into Lumine’s rapid growth trajectory and path to profitability. Stay tuned for the detailed report on Substack and my Global Quality Investing Discord. The vertical market software space offers rich opportunities, and Constellation stands out as one of the best led companies at the moment. Until next time, keep compounding!
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Disclaimer
The information in this article is provided for informational and educational purposes only.
The information is not intended to be and does not constitute financial advice or any other advice, is general in nature, and is not specific to you. Before using this article’s information to make an investment decision, you should seek the advice of a qualified and registered securities professional and undertake your own due diligence.
None of the information in this article is intended as investment advice, as an offer or solicitation of an offer to buy or sell, or as a recommendation, endorsement, or sponsorship of any security, company, or fund. The author is not responsible for any investment decision made by you. You are responsible for your own investment research and investment decisions.