The TSX finished strong last year but tariff threats to start 2025 prevented the market from further advancing. While market volatility remains high, it has opened buying opportunities. Many tech and energy stocks are trading below their estimated values.
Computer Modelling Group (TSX:CMG), in particular, is a steal at today’s prices. The Canadian stock is an intersection of the technology and energy sectors. At $7.90 per share, the year-to-date loss is -25.35%. The 2.52% dividend yield somehow compensates for the temporary weakness. However, given the essential simulation technology it provides to the new energy industry, a breakout could arise soon.
Partnerships with energy companies
CMG uses science and technology to help solve complex subsurface and surface challenges for the new energy industry. Subsurface or activities and resources below the Earth’s surface include geothermal energy, oil & gas extraction, and subsurface storage. Surface refers to activities and infrastructure at the Earth’s surface, such as pipelines, power plants, and renewable energy installations.
This $654.55 million global software, innovation, and consulting company partners with or caters to energy companies. Besides its headquarters in Canada, CMG has offices in the U.S., Brazil, Colombia, Germany, Dubai, and Asia, serving international clients, including industry giants and non-conventional producers.
CMG has seven solutions depending on customers’ needs and field development strategies, including a reservoir-specific recovery process. Science-backed technology assists in achieving clear information on production targets, budgets, and objectives.
Transformation strategy
In 2022, management launched CMG 4.0, a multi-faceted transformation strategy to drive sustained organic growth in the reservoir simulation business. It’s also a move towards digitization in the energy industry. The strategy also addresses the growing need for complex energy transition solutions. The focus is on growth, profitability, and acquisitions.
CMG’s recurring revenue model assures strong operating margins and cash flows. By using and investing excess capital to pursue acquisitions, the company intends to build long-term software revenue growth. It targets businesses that will add diversity to the product offerings within the energy and adjacent industries.
Latest quarterly performance
In the third quarter (Q3) of fiscal 2025 (three months ending December 31, 2024), total revenue and free cash flow (FCF) rose 8% and 21% year over year to $35.7 million and $8.8 million. Net income soared 71% to $9.6 million compared to Q3 fiscal 2024. The run rate this fiscal year is $24.5 million compared to the $21.2 million average net income in the last four fiscal years.
On November 12, 2024, CMG completed the acquisition of German firm Sharp Reflections GmbH, its second major acquisition after Bluware-Headwave. Software and services company Bluware specializes in cloud and interactive deep learning solutions for subsurface decision-making. Sharp is a seismic processing and interpretation platform for geophysicists and quantitative interpreters.
Real value
Pramod Jain, chief executive officer of CMG, said the two acquired high-quality businesses are in the early stages of software growth and heavy on services revenue. Management will adjust its focus to recurring software revenue and expand margins. The shift should strengthen CMG’s margin profile and cash-generating potential. Now is a good time to scoop the stock before rising to its “real” value.
