Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.
Analyst 3: That’s the bottom line, for me. Conceptually, I would say, it comes down to making an assumption about what kind of return on capital they are going to earn and how much can they reinvest? Those are the two things; that is what it comes down to. I know we’ve talked, in the past, about terminal value for Constellation. Earlier on, I had more concerns about that too but, now, I’m at a place where I don’t really worry about that. I don’t think you have any more terminal value risk with Constellation than you do with any other business, at this point.
For me, conceptually, it’s all about making some assumption about return on capital; making some assumption about how much they can reinvest, cast that out over a decade and put a multiple on it.
Analyst 3: There are two different things there. One would be the reinvestment rate and the other is the terminal value of what they have. The question is, how much cash can they get out and reallocate. I’m at the point where I don’t think there is any bigger risk than for any other business because they are not sitting still with it. They update the software; they try to keep it going. But at some point, possibly, they get pulled out for something better but I think that’s a risk that almost any software company has.
That’s the way I would think about it but the reinvestment risk, for me, is the big one. I don’t know what the bottom-line number is. If you get to 25% return on capital and they reinvest 60%, over a decade, that’s 15% compounding, roughly. If they wind up reinvesting 30% or 40% of what they generate, over the next decade, then you’ve got a problem, I think. Somehow, with Mark and his team, I suspect they are going to find good things to do.
This document may not be reproduced, distributed, or transmitted in any form or by any means including resale of any part, unauthorised distribution to a third party or other electronic methods, without the prior written permission of IP 1 Ltd.
IP 1 Ltd, trading as In Practise (herein referred to as "IP") is a company registered in England and Wales and is not a registered investment advisor or broker-dealer, and is not licensed nor qualified to provide investment advice.
In Practise reserves all copyright, intellectual and other property rights in the Content. The information published in this transcript (“Content”) is for information purposes only and should not be used as the sole basis for making any investment decision. Information provided by IP is to be used as an educational tool and nothing in this Content shall be construed as an offer, recommendation or solicitation regarding any financial product, service or management of investments or securities.
© 2024 IP 1 Ltd. All rights reserved.
Subscribe to access hundreds of interviews and primary research