Is Computer Modeling Group stock a buy?

Calgary-based Computer Modelling Group (Computer Modeling Group Stock Quote, Chart, News, Analysts, Financials TSX:CMG) provides reservoir simulation software and markets to the oil and gas industry internationally.

According to Tipranks, Computer Modelling Group stock is currently ranked a “Hold”, with four analysts covering it.

The average target price for the stock is $9.83 and the highest target is $10.00.

Computer Modeling Group stock closed November 3 on the TSX at $9.72.

Cannacord Genuity, BMO Capital, IA Capital Markets and Barclays are investment banks currently covering the stock.

In November of 2022, Ross Healy of Strategic Analysis Corp told BNN Bloomberg that he was not bullish on the stock.

“It’s an interesting company and they’re very, very profitable,” he said . “The return on equity of that company is something like about 37 per cent and it’s been very high for a long period of time.”

“As a consequence, the valuation of the company measured in price to book terms has also been been very high. That’s the good news,” he said. “The unfortunate news is that the company has never used its potential to expand their business at a faster rate.”

“During their growth phase the valuation got quite high,” Healy added. “It got up to about 16x its book value. And so where did it go from there? Well, if they can’t expand or they won’t expand and they won’t use their tremendously high valuation to raise new equity money and expand their business, well, what happens is you get a nicely profitable but not growing company. As a consequence the price to book on the stock has fallen from 16 down a long way and the stock has fallen.”

“And they’re actually using the cash that they’ve got — about $48 million, according to their last balance sheet — they’re using it to buy back their stock at a very, very high valuation level. Well, what are they thinking about?” he said.

“I would have thought that they would have known more about how to utilize the capital markets but apparently not,” Healy concluded. “I frankly would go elsewhere because I don’t see where this stock is going to go.”

Others, however, disagree with this take. In September of 2021, Elias Foscolos of iA Capital Markets liked the look of the stock.

“CMG has developed its suite of software through a long history of R&D and real-world problem solving with customers, and as a result has established itself as one of the dominant players in oil reservoir simulation worldwide, specializing in modelling for complex assets that use advanced recovery techniques,” Foscolos said.

“We forecast that CMG will post improved financials commencing in F2023, with the potential to eventually deliver low double-digit revenue growth through multiple levers,” Foscolos said. “Given the pressure on the stock YTD, we believe that CMG’s leading, defensible competitive position, global diversification, and strong earnings and cash flow profile are being offered at a discounted price,” the analyst concluded.