Pieter Slegers — CMG: The Next Constellation Software?
A full 15-step investment case on Computer Modelling Group — a CAD 566m Canadian reservoir-simulation software house being turned into a serial acquirer by ex-Constellation people. Total Quality Score 8.3/10.
One-line take: the pitch is people plus playbook, not the legacy business. CMG's core product simulates oil-and-gas reservoirs — 75% of the 25 largest oil companies are customers, 65% of revenue recurring, a 98%+ renewal rate and an 80.7% gross margin — but the growth case rests on CEO Pramod Jain (since 2022) converting it into a Constellation-style acquirer: Constellation's Mark Miller chairs the board, the largest shareholder (Edgepoint, 25.3%) is run by another Constellation board member, and the head of M&A is ex-CSI. Revenue growth has run 26.3%/yr since Jain arrived against a negative rate before, and compensation is being rewired to ROIC plus open-market share purchases with cash bonuses (a Berkshire/Constellation device). Sell-side long-term EPS estimates are negative (−5%) and Slegers says so explicitly — he disagrees. Valuation: forward PE 22.6x vs a 26.9x 10-yr average, an earnings-growth model implying 12.3%/yr, and a reverse DCF needing only 6.2% FCF growth for a 10% return. The stock is −35.1% YTD; "the recent price drop might provide opportunities for long-term investors." Score: 8.3/10, ending "to be continued."
1. Stocks & names mentioned
Stance reflects how each is framed in this post. Research legend: QT Qualtrim · SA Seeking Alpha · STK Stock Analysis. Foreign listings use their Yahoo symbol as the row id — Computer Modelling Group is CMG.TO (bare "CMG" is Chipotle) and Constellation is CSU.TO, with research pointing at the US OTC lines (CMDXF, CNSWF). Heico, Lifco, Autodesk and Adobe appear only as one-line analogies and are left out of the table. This is a written post with no timestamps — the At link opens the article.
| Ticker | Name | Research | View | What he said | At |
|---|
| CMG.TO | Computer Modelling Group | QT · SA · STK · FA | Positive | "A small Canadian business is quietly copying Constellation Software's winning formula… a cash-generating machine backed by a top-tier M&A team ready to deploy capital." Deep switching-cost moat (98%+ renewals, 80.7% gross margin, ROIC 16.9%, net cash), CEO Pramod Jain growing revenue 26.3%/yr since 2022, insider ownership 27.1%. Trades at 22.6x forward vs a 26.9x 10-yr average; reverse DCF needs only 6.2% FCF growth for a 10% return. Total Quality Score 8.3/10; −35.1% YTD "might provide opportunities for long-term investors." | read ↗ |
| CSU.TO | Constellation Software | QT · SA · STK · FA | Neutral | The benchmark rather than a pick here: "Constellation Software is the best serial acquirer in the world… It has created huge shareholder value by buying Vertical Market Software (VMS) companies." Cited for the 1,000+ subsidiary comparison (CMG has done two deals — Bluware and Sharp), the compensation template CMG is copying, and the Volaris/Edgepoint people now around CMG's board. | read ↗ |
Stance = how each name is framed in this post, not a price rating. The 15-step scoring method and the valuation triangulation live on the actionable insights page.
2. Talking points
The pitch in one line
- "A small Canadian business is quietly copying Constellation Software's winning formula. It is a cash-generating machine backed by a top-tier M&A team ready to deploy capital."
- General information: TSE-listed, CAD 6.86 ($5.0) per share, CAD 566.2m ($412.5m) market cap, CAD 2.0m average daily volume — small enough that most institutions can't own it. Type: oligopoly.
Step 1 — the business model: reservoir simulation, 75% of the biggest oil companies
- CMG's software simulates how oil and gas reservoirs behave over time — "like taking off the blindfold" — so producers can manage resources more efficiently. 75% of the 25 largest oil companies are customers; 65% of revenue is recurring.
- The transformation: CEO Pramod Jain is "slowly transitioning CMG into a serial acquirer," with Bluware and Sharp (seismic-data interpretation software) as the first two deals.
The Constellation connection — Chris Mayer's note
- Quoted in full: "There is a certain Constellation Software influence here. Mark Miller is chairman of the board. The largest shareholder is a Constellation board member. And the head of acquisitions is an ex-CSI guy. The CEO, Pramod Jain, gets it."
- Edgepoint (run by Constellation board member Andrew Poster) holds 25.3%; total insider ownership 27.1%.
Step 2 — management: "compounding" and "extreme ownership"
- Jain's quarterly shareholder letters name one word he stands for — compounding — and repeat "bring a 1% improved version of yourself every day and you'll be 37 times better in a year," plus "extreme ownership" (taking full responsibility for his own mistakes).
- The check on the rhetoric: revenue growth averages 26.3%/yr since he joined in 2022, versus negative growth before. "Words are cheap, actions speak louder" — but a 2022 start means there is no long track record yet.
Step 3 — the moat: switching costs, complexity, and the university channel
- Once integrated, replacing CMG is costly and slow, and engineers prefer familiar tools — evidenced by a 98%+ contract renewal rate. Building a rival simulator "isn't a weekend coding project."
- The durability trick: strong collaboration with universities, so the next generation of engineers trains on CMG's tools — "exactly the same as what Autodesk and Adobe are doing." Gross margin 80.7%; ROIC 16.9%.
Step 4 — end market and the CMG 4.0 runway
- Constellation has 1,000+ subsidiaries; CMG has done two meaningful acquisitions. "A comparison between Constellation and CMG isn't exactly fair. But it tells you one thing: CMG has a long runway ahead."
- Strategy called CMG 4.0: organic growth in simulation, profitability, and acquisitions — "where the real compounding will happen."
Step 5 — risks: cyclicality, disruption, organic growth, and key-man
- Energy cyclicality flows straight into revenue; technological disruption requires continuous innovation; long-term organic growth of the core "remains uncertain to me."
- "However, the most significant risk is leadership" — the whole re-rating case rests on Jain staying.
Steps 6–7 — balance sheet and capital intensity
- Interest coverage 18.3x, a net cash position of CAD 5.3m, goodwill/assets 7.7% — all inside his thresholds. Jain on leverage: "I have also seen what happens when it goes unchecked… financial leverage should be used carefully and opportunistically."
- CAPEX/sales 1.1% and CAPEX/operating cash flow 4.8%: "This means that there's more fuel available for the acquisition engine."
Steps 8–9 — capital allocation and profitability, and the dividend he doesn't want
- ROE 29.2%, ROIC 16.9%, gross margin 80.7%, net margin 17.3%, FCF/net income 127.0%.
- "The one thing I don't like is the fact that CMG pays a dividend. I'd prefer it if they kept compounding capital internally. Management seems to agree. They are cutting their dividend."
Step 10 — rewiring compensation: ROIC targets and open-market buying
- Average SBC at 6.9% of net income. Going forward executives are measured on ROIC as well as revenue growth.
- The structural change: bonuses paid in cash rather than RSUs, with employees required to buy CMG shares on the open market — "very similar to what Berkshire Hathaway and Constellation Software are doing."
Steps 11–12 — a bad ten-year record, a good three-year one, and estimates he rejects
- 10-yr revenue CAGR 4.3%, 10-yr EPS CAGR −4.1%, 5-yr EPS CAGR −1.4% — all failures. But 3-yr revenue CAGR (the Jain period) is 25.0%.
- Consensus expects 1.3% revenue and 4.7% EPS growth over two years and a −5.0% long-term EPS CAGR. "To be honest, I disagree with the long-term estimates" — because of high returns on capital, a strong M&A team, and the CEO.
Step 13 — three valuations, all pointing the same way
- Forward PE 22.6x vs a 26.9x 10-year average — slightly undervalued.
- Earnings-growth model: 12% EPS growth + 1.5% dividend yield with the multiple compressing 22.6x → 20.0x gives 12.3%/yr. (He uses a lower dividend yield than today's on the view that the payout keeps shrinking to fund deals.)
- Reverse DCF on CAD 30.3m of forward FCF: only 6.2%/yr FCF growth is needed to earn 10%/yr. "This looks very reasonable."
Steps 14–15 and the score
- Owner's earnings: 5-yr CAGR 1.4% and 10-yr −1.3% both fail; since Jain, 8.4%. Shareholder value: −35.1% YTD, 5-yr CAGR 9.5%, but 16.3%/yr since the 1997 IPO.
- Total Quality Score 8.3/10. "The lesson? As Chris Mayer wrote, it looks like Pramod Jain is on to something." Closing pointer for further study of the model: Heico, Constellation Software and Lifco.
3. In plain English
A jargon-free summary of the thesis behind each name. (Renders on each name's consolidated page.)
CMG.TO — Computer Modelling Group Positive
Computer Modelling Group sells software that lets oil and gas companies simulate what is happening inside an underground reservoir — how the oil will flow, where to drill, what a change in pressure will do — so they can make expensive decisions without guessing. Three quarters of the 25 largest oil companies use it, two thirds of the revenue arrives as recurring subscriptions, and over 98% of contracts get renewed. Engineers learn it at university, which quietly locks in the next generation of customers, the same trick Adobe and Autodesk use.
But the reason Slegers is writing about it is a change of plan. Since 2022 the CEO, Pramod Jain, has been turning a single-product software company into a machine that buys other small software companies — the model Constellation Software used to compound for two decades. The people around him make that credible: Constellation's Mark Miller chairs the board, the biggest shareholder is another Constellation director's fund, and the head of acquisitions came from Constellation. Insiders own 27% of the company, and revenue has grown 26% a year under Jain after years of shrinking.
The stock had fallen 35% for the year when he wrote, and the sell-side actually forecasts declining earnings long term — a forecast he says he disagrees with. On his three valuation checks the price implies very little: only about 6% annual cash-flow growth is needed to earn 10% a year. He scores the business 8.3 out of 10 and treats the drawdown as the opportunity. The row uses the Toronto ticker (CMG.TO) because bare "CMG" is Chipotle; the US over-the-counter line is CMDXF.
CSU.TO — Constellation Software Neutral
Constellation appears here as the template, not the recommendation. It buys small software companies that serve one narrow industry each — the kind of program a marina, a dentist or a bus operator cannot run without — and now owns more than a thousand of them, letting each keep operating on its own. Slegers calls it the best serial acquirer in the world.
Its relevance to the CMG case is threefold: it proves the model works at scale, its former executives are the ones now steering CMG, and its compensation design (cash bonuses that employees must use to buy shares on the open market) is being copied at CMG. He offers no valuation or stance on Constellation itself in this post — it is the yardstick against which the small Canadian imitator is measured.
Summary derived from the archived Compounding Quality post (text in transcript.txt) for personal study. Not investment advice. © Compounding Quality / Pieter Slegers for source material.