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Fundamentals remain constant and the company remains the industry leader.

Recent earnings miss has sent the stock down 20%.

Earnings weakness is the result of minor revenue stream decline and the company has seen this before.

Computer Modelling Group (OTC:CMDXF) is a software company serving the oil and gas industry. Headquartered in Calgary, Canada, their market-leading position in software for reservoir modeling for unconventional hydrocarbon recovery is supported by offices in Houston, London, Caracas, Dubai and Bogota. Their customers are oil companies and technology centers in over 50 countries. Shares on the OTC are illiquid and the prudent investor will purchase it on the Canadian exchanges where it trades as CMG. It will be referred to it by the Canadian ticker in this article.

A previous article of ours late last year outlines our reasons to be long this stock, notably:

-10 year return prior to our last article of over 5000%, and over 5 years the dividend has over doubled.

-increased reliance and projected reliance on hydrocarbon recovery from unconventional sources

Canadian crude source outlook

-Strong funding of R&D to maintain its industry-leading position in the market.

-net profit margins of 32 to 38%

-No long or short term debt, and 7% of its market cap in cash for in-house financing.

-Double digit year-over-year revenue and gross profit increases

Since the last article, none of these facts have changed.

On August 13, 2014, CMG reported earnings of $ 0.08 per share, missing the analyst consensus estimate of $ 0.10. The stock proceeded to decline over 20% by August 21. It has since recovered by 8 %.

We believe this to be an overreaction to the news as a result of the sources of income CMG possesses. In financial 2013, 92% of CMG's earnings were resultant from software license sales, and 8 % from non-recurring professional service revenue. Software license revenue can be divided into two types; annuity/maintenance revenue makes up 87% of total revenue and is a fee charged for software use for a period of a year or less, with high renewal rates. The minor software revenue stream is perpetual licenses which are bought once, after which that version can be used in perpetuity; additional maintenance packages are sold for support and current version access. It can be argued that the annuity/maintenance revenue stream is more important in terms of both percentage of total revenue, and its constant nature, whereas perpetual sales show much more variation between quarters. The below graph from the quarterly report illustrates these revenue streams nicely.

(click to enlarge)CMG revenue sources

The most recent quarter saw a 14% increase in annuity/maintenance revenue over the same quarter last year, while perpetual license revenue dropped almost 40% over the same period. The net result on revenue was an 8% increase in revenue compared to last year's quarter, and lower ( 11%) net revenue. However, by looking at the revenue streams in the graph above, we see this is a natural variation for CMG quarter to quarter. Based on this, a 20% drop in share price for a natural variation in revenue is completely unjustified, when the fact that expenses were consistent with previous quarters.

As a result, we expect a quick rebound in share price, and indeed since the low on August 21, share price has begun to rebound. Investors looking for an entry point to this great company will not get a better opportunity than the next few days as the irrational price behavior of this stock is discovered. It would not be unexpected to see 15% gains over the coming week. I personally tripled my position on the morning of the 21st.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.