Is there a good reason to think that there might be an opportunity here that I missed 10 years ago with CSU?
Thanks for your ever helpful insight!
It is true that P/E has not been a reliable metric to measure the CSU group’s valuation. Mainly because their primary growth engines come from acquisitions, which they have been able to deploy the majority of their cash flow each year to pursue growth. As a result, amortization expense (accounting for M&A) would account for the majority of total expenses, the earnings would be understated, and the stock always appear to be expensive.
We think investors can look at metrics such as EV/EBITDA, or Price/Free Cash Flow to have a better picture of the valuation. Currently:
CSU’s EV/EBITDA multiple is 33.0x
TOI’s EV/EBITDA multiple is 37.0x
(based on total shares outstanding of 129,841,819 and EBITDA converted from EUR to $321M CDN)
Although TOI is trading at a higher valuation compared to CSU, TOI’s organic growth (around 6%-8%) and total growth (expected around 25% for the near future) is impressive. We think TOI’s premium valuation makes sense given its growth prospects. For these types of compounders, investors can average into the position over time. Trading can be thin, but over time we think they are going to work out very well.