Title: CMG: The Next Constellation Software? — Investment case Computer Modelling Group Show: Compounding Quality (compoundingquality.net — Pieter Slegers' quality-investing newsletter) Guest: Pieter Slegers (author) Date: 2025-JUN-19 URL: https://www.compoundingquality.net/p/cmg-the-next-constellation-software-586 Length: written post (paid) — no timestamps Note: Verbatim article text captured via logged-in session; page chrome removed. Charts/images referenced as "Source: …" are not reproduced here.
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.
Let's uncover this hidden gem.
CMG - General Information
Company name: Computer Modelling Group (CMG) ISIN: CA2052491057 Ticker: TSE: CMG Type: Oligopoly Stock Price: CAD 6.86 ($5.0) Market cap: CAD 566.2 million ($412.5 million) Average daily volume: CAD 2.0 million ($1.5 million)
15-Step Approach
Now let's use our 15-step approach to analyze the company. At the end, we'll give CMG a score on each of these 15 metrics. This results in a Total Quality Score.
1. Do I understand the business model?
Computer Modelling Group (CMG) creates software for simulating oil and gas reservoirs.
Their technology helps companies predict how reservoirs will behave over time. It's like taking off the blindfold for these businesses.
This allows more efficient and cost-effective management of energy resources.
As a result, 75% of the 25 largest oil companies are customers of CMG.
With 65% of its revenue being recurring, their software is very sticky.
While their core business is interesting, Computer Modelling Group is becoming well-known for a different reason.
CEO Pramod Jain is slowly transitioning CMG into a serial acquirer.
And he seems to know how to do it.
Chris Mayer, who recently bought shares, wrote:
"One stock I bought recently is Computer Modelling Group, listed in Canada. 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."
Constellation Software is the best serial acquirer in the world.
It has created huge shareholder value by buying Vertical Market Software (VMS) companies.
Now, (former) Constellation leaders are helping CMG. This could be a big deal.
CMG's latest move? The acquisition of Sharp.
Sharp is a software tool that helps engineers interpret seismic data. Their software transforms large data sets into a 'simple' visualization.
2. Is management capable?
Pramod Jain joined Computer Modelling Group in 2022 as the CEO.
At the end of each quarter, Pramod writes a shareholder letter.
I have read them, and he impressed me.
Here is what he wrote in his most recent letter:
"A colleague recently challenged me with the question 'what is that one word that you stand for?' It was an easy answer for me because it is a deeply held and long-standing belief. That one word is 'compounding'. Compounding is said to be the 8th wonder of the world and in both my personal and professional life, I believe 'bring a 1% improved version of yourself every day and you'll be 37 times better in a year'. Our employees know this well as I've repeated it often since joining CMG. It is something I strive to do every day."
Another word that keeps coming back in his letters is 'extreme ownership'. This means Pramod will always take full responsibility for his own mistakes.
All of this sounds great. But words are cheap, actions speak louder.
Since he joined CMG not so long ago (2022), it's hard to speak of a track record.
Nevertheless, he is growing Revenue and Net Income at an interesting rate.
The average Revenue Growth since Pramod joined is 26.3% per year. And this while the growth before he joined was negative.
It seems like Pramod practices what he preaches.
What's also interesting is the largest shareholder of CMG.
Edgepoint holds 25.3% of CMG and is managed by Andrew Poster, another Constellation Software board member.
As a result, insider ownership stands at 27.1%.
3. Does the company have a sustainable competitive advantage?
Computer Modelling Group has a moat for sure. And it's a deep one.
Their biggest competitive advantage? High switching costs.
Once CMG's software is integrated, it becomes costly and time-consuming for oil and gas companies to switch to a different provider. Engineers also prefer to stick with familiar tools.
But don't take my word for it, look at the impressive contract renewal rate of over 98%.
Another major advantage is the complexity of its technology.
Developing software that accurately simulates oil and gas reservoirs isn't a weekend coding project, it requires significant expertise.
The R&D investment needed to compete with CMG is both time-consuming and expensive. This creates high barriers to entry.
According to Pramod, CMG also benefits from strong brand recognition.
The durability of the moat comes from its strong collaboration with universities.
The next generation of engineers is being trained with CMG's tools, not with the tools of competitors. This is a smart move.
This is exactly the same as what Autodesk and Adobe are doing.
Gross Margin: 80.7% (> 40% ✅). Return On Invested Capital (ROIC): 16.9% (> 15% ✅).
4. Is the company active in an attractive end market?
Constellation Software has more than 1,000 subsidiaries.
CMG, on the other hand, has only done two meaningful acquisitions with Bluware and Sharp.
Just like Sharp, Bluware is a company that makes special software and services to help scientists understand seismic data. Bluware has a specific focus on cloud technology.
A comparison between Constellation and CMG isn't exactly fair. But it tells you one thing: CMG has a long runway ahead.
They combine this runway with a clear strategy which they call CMG 4.0:
Growth refers to organic growth in the simulation business. Profitability. Acquisitions are where the real compounding will happen.
5. What are the main risks for the company?
One of the biggest concerns is the energy industry's cyclical nature. Since CMG serves this sector, fluctuations in energy markets could directly impact its revenue.
Another risk is technological disruption. To stay ahead, CMG must continue innovating and ensuring it has the best technology in the industry.
There's also the question of organic growth. Ideally, CMG would expand both organically and through acquisitions, but the long-term growth of its core business remains uncertain to me.
However, the most significant risk is leadership. Pramod Jain, the CEO, has played a major role in transforming CMG. If he were to leave, it could be a serious setback for the company.
6. Does the company have a healthy balance sheet?
Interest Coverage: 18.3x (> 15x ✅). Net Debt/FCF: Net Cash Position of CAD 5.3 million (✅). Goodwill/Assets: 7.7% (< 20% ✅).
Computer Modelling Group has a very healthy balance sheet.
A Net Cash Position is very conservative. The CEO wrote:
"Leverage can be an effective tool but, in my career, I have also seen what happens when it goes unchecked. My priority is to deploy our Free Cash Flow primarily and to potentially use leverage strategically to supplement on an as needed basis. Most importantly, I want to reassure our shareholders that I believe in maintaining a strong balance sheet and that financial leverage should be used carefully and opportunistically to enhance shareholder value without taking on undue risk." - Pramod Jain
7. Does the company need a lot of capital to operate?
CAPEX/Sales: 1.1% (< 5% ✅). CAPEX/Operating cash flow: 4.8% (< 25% ✅).
CMG doesn't need a lot of capital to operate. This means that there's more fuel available for the acquisition engine.
8. Is the company a great capital allocator?
Return on equity (ROE): 29.2% (> 20% ✅). Return on Capital (ROIC): 16.9% (> 15% ✅).
Although these numbers are declining, they still look very good.
The good news is that since Pramod joined, he has been able to keep them stable and high if we keep the rising goodwill into account.
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.
9. How profitable is the company?
Gross margin: 80.7% (> 40% ✅). Net Profit Margin: 17.3% (> 10% ✅). FCF/Net income: 127.0% (> 80% ✅).
CMG is a very profitable company.
10. Does the company use a lot of Stock-Based Compensation?
Avg. SBC as a % of Net Income past 5 years: 6.9% (< 10% ✅).
Pramod is changing the way CMG is compensating insiders. And it looks very attractive to shareholders.
Going forward, executives will not only be measured by revenue growth but also by Return On Invested Capital (ROIC).
In the future, employees won't get bonuses in the form of Restricted Share Units (RSUs). Instead, they'll get cash. And they'll need to buy CMG shares with that cash on the open market.
This plan is very similar to what Berkshire Hathaway and Constellation Software are doing.
(Annual Report 2024, 'Organizational Evolution' on page 3.)
11. Did the company grow at attractive rates in the past?
Revenue growth past 5 years (CAGR): 11.3% (> 5% ✅). Revenue growth past 10 years (CAGR): 4.3% (❌). EPS growth past 5 years (CAGR): -1.4% (❌). EPS growth past 10 years (CAGR): -4.1% (❌).
These numbers don't look good, but Pramod is turning things around:
Revenue growth past 3 years (CAGR): 25.0% (✅). EPS growth past 3 years (CAGR): 5.6% (❌).
These numbers already look better.
12. Does the future look bright?
Exp. Revenue growth next 2 years (CAGR): 1.3% (❌). Exp. EPS growth next 2 years (CAGR): 4.7% (❌). Long-term growth estimate EPS (CAGR): -5.0% (❌).
To be honest, I disagree with the long-term estimates.
Here's why I believe the future growth will be much higher: High Returns on Capital. A very strong M&A team to deploy capital. Pramod is an impressive CEO.
13. Does the company trade at a fair valuation level?
A comparison of the multiple with the historical average: Today, CMG trades at a forward PE of 22.6x compared to a historical average of 26.9x. Slightly undervalued.
Earnings Growth Model: Expected return = EPS Growth + Dividend Yield +/- Multiple Expansion. Assumptions: EPS Growth 12.0% per year over the next 10 years; Dividend Yield 1.5%; Forward PE to fall from 22.6x to 20.0x. Expected yearly return = 12.3%. A potential return of 12.3% per year looks attractive. (Dividend Yield used is lower than current — I believe CMG will further reduce its dividends to have more available for acquisitions.)
Reverse DCF: The consensus states that CMG's Free Cash Flow over the next 12 months will be equal to 30.3 million CAD. Our Reverse DCF indicates that CMG should grow its Free Cash Flow by 6.2% per year to return 10% per year to shareholders. This looks very reasonable.
Forward PE: 22.6x (< 26.9x 10-yr average ✅). Earnings Growth Model: 12.3% (> 10% ✅). FCF-Growth Reverse DCF: 6.2% (realistic ✅).
14. How did the Owner's Earnings of the company evolve in the past?
CAGR Owner's Earnings (5 years): 1.4% (❌). CAGR Owner's Earnings (10 years): -1.3% (❌). CAGR Owner's Earnings (Since Pramod): 8.4% (✅ vs >12% threshold — marked ✅ in the post).
15. Did the company create a lot of shareholder value in the past?
YTD: -35.1%. 5-year CAGR: 9.5%. CAGR since IPO in 1997: 16.3% (> 12% ✅).
The recent price drop might provide opportunities for long-term investors.
Quality Score
CMG gets a Total Quality Score of 8.3/10.
The lesson? As Chris Mayer wrote, it looks like Pramod Jain is on to something.
To be continued.
Everything In Life Compounds Pieter
(If you like the serial acquirer model, here are three other great businesses to learn from: Heico, Constellation Software, and Lifco)
Used sources: Interactive Brokers (portfolio data and executing all transactions); Fiscal.ai (financial data)