Valued at a market cap of $421 million, Computer Modelling Group (TSX:CMG) is a software and consulting company specializing in reservoir simulation and seismic interpretation software for the oil and gas industry.
CMG develops tools for modelling oil recovery processes, thermal recovery, compositional analysis, and unconventional reservoirs. It also provides professional services, including consulting, training, and research support, to clients globally.
CMG stock is down 55% from its all-time high, allowing you to buy the dip and benefit from outsized gains when sentiment recovers. Let’s see if you should own this oversold TSX tech stock right now.
Is CMG stock a good buy today?
Computer Modelling Group reported mixed second-quarter (Q2) results as the software company navigates a challenging environment marked by volatile energy markets and cautious customer spending.
Revenue in fiscal Q2 (ended in September) rose 2% year over year to $30.2 million. Its core recurring revenue business grew sales by 13% to $20.7 million, driven by acquisitions. However, organic sales were down 17% year over year, as the oil and gas sector continued to reduce spending amid lower prices. Its perpetual software license business also declined by 56% as companies delayed new technology investments.
CMG reported an adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) of $7.6 million, down 25% year over year. Moreover, its margin narrowed from 34% to 25% over the last 12 months.
CMG attributed rising operating expenses and lower revenue from its higher-margin reservoir and production solutions business to lower margins. Earnings per share fell 40% to just $0.03 in Q2, while free cash flow plunged by 68% to $2 million due to higher capital spending.
Computer Modelling Group closed its third acquisition during the quarter, purchasing SeisWare International to strengthen seismic software offerings. It recently announced a major win with Shell for a multi-year licensing agreement covering its simulation software suite, including the CoFlowTM platform. This deal represents the payoff from a long-term product development relationship.
Management expects business to pick up in the second half of the fiscal year as seasonal contract renewals kick in. The company projects organic recurring revenue will turn positive in the fourth quarter and stay positive through fiscal 2027. To fund more acquisitions and boost its financial flexibility, Computer Modelling Group recently closed a $100 million credit facility.
The board also approved a quarterly dividend of $0.01 per share, down from $0.05 in the year-ago period. The company launched a share-buyback program as directors believe the stock doesn’t reflect the business’s underlying value.
While near-term headwinds persist from weak energy markets and extended sales cycles, management expects growth to return as customer spending normalizes.
Is this TSX tech stock undervalued?
Investors are rightfully worried about CMG’s declining profit margins, declining sales, and a dividend cut. However, Bay Street estimates that the TSX tech stock will increase revenue from $127.4 million in fiscal 2026 to $247 million in fiscal 2030. In this period, free cash flow (FCF) is projected to improve from $28.5 million to $86 million.
Today, CMG pays shareholders an annual dividend of $0.04 per share, which translates to a yield of 0.8%. Given its outstanding share count, CMG’s annual dividend expense is around $3.3 million, indicating a payout ratio of less than 12%.
If CMG stock is priced at 10 times forward FCF, which is reasonable, it could surge 100% over the next 45 months. Analysts remain bullish on CMG, expecting it to gain 40% from current levels, given consensus price targets.
