This is a business that has to keep acquiring ever bigger targets to grow top line revenue ('organic' growth was 1% in 2024) to justify valuation, which I think is a bad thing, long term.
As such, CSU continues to deploy more and more of their operating cash flows to acquire bigger businesses, even having to raise capital in recent years. Where does that leave future shareholder returns?
If cash flow is king, I don't see how one can justify current prices.
Thanks for the comment, these are great points and definitely worth mentioning.
I view CSU less as a traditional software company and more as a capital allocation company.
While organic growth is low, the magic lies in their ability to reinvest 100% of their FCF at high rates of return (historically 25+%). As long as their ROIC exceeds their cost of capital, retaining that cash drives more shareholder value than paying a dividend.
Acquisitions therefore act as their growth capex. If they stopped acquiring tomorrow, the FCF would be paid out to shareholders, but the compounding would stop.
It’s definitely a bet on management’s ability to grow even with the law of large numbers working against them, but so far, it still works.
I've never really understood how to value CSU.
This is a business that has to keep acquiring ever bigger targets to grow top line revenue ('organic' growth was 1% in 2024) to justify valuation, which I think is a bad thing, long term.
As such, CSU continues to deploy more and more of their operating cash flows to acquire bigger businesses, even having to raise capital in recent years. Where does that leave future shareholder returns?
If cash flow is king, I don't see how one can justify current prices.
Thanks for the comment, these are great points and definitely worth mentioning.
I view CSU less as a traditional software company and more as a capital allocation company.
While organic growth is low, the magic lies in their ability to reinvest 100% of their FCF at high rates of return (historically 25+%). As long as their ROIC exceeds their cost of capital, retaining that cash drives more shareholder value than paying a dividend.
Acquisitions therefore act as their growth capex. If they stopped acquiring tomorrow, the FCF would be paid out to shareholders, but the compounding would stop.
It’s definitely a bet on management’s ability to grow even with the law of large numbers working against them, but so far, it still works.