RE:CMG is heading to double digits before year end.Kanatainvestor wrote: I have had sometime this weekend to dive more into the results, and I feel very comfortable that CMG will trade in the double digits fairly soon.
CMG operating margins are nothing short of phenomenal, at 47% (level reached last quarter) this company generates 47 cents in operating profits (and 33c in net income) for each additional dollar of revenues. Margins of this magnitude are extremely rare and this speaks to the strong moat CMG has in its advanced reservoir simulation business.
What has been depressing this company stock price for years is the lack of revenue growth, margins like this are attractive, but without strong growth they become a sort of an annuity, which is basically how this company was run for years.
However, with the new management team focusing on growth, the value creation growth profile for CMG is changing radically. For now, the new management team is generating growth while maintaining if not strengthening margins, but even if these margins were to compress somewhat as growth accelerates, this company will still generate an incredible return going forward.
Assuming that CMG can grow revenues by 30%/year over the next 24 months at 40% in operating margins (29% in net income margins), EPS would reach 36C in fiscal 2024 and 45c in fiscal 2025. At 35 P/E the stock price will exceed $12.6 in fiscal 2024 and $15.7 in fiscal 2025.
The aforementioned numbers are fairly conservative. Today, the CMG generates 22% of its revenues from energy transition related revenues such as carbon capture simulation, but the carbon capture industry today is not even 1% the size of the O&G space. This fact speaks to the incredible growth opportunity in this space not withstanding the more elaborate offering being introduced in the company core O&G offering.
Companies with such a strong return on investment, and are exposed to high growth industries (such as the energy transition) trade a much higher P/E than 35. What this means is that CMG might be entering a phase of accelerating earning growth and expanding valuations, if this happens the stock can trade in the $20s in 24 months at a 45 P/E.
While I agree this could be a $10-20 stock down the road, I don't see a meaningful rally happening until insiders have sold their holdings down to targeted levels.
Floating by at $4 through the Pandemic, company has been devalued since the emergence of US shale 2013-2014, we may have some consolidation here near $8 for a while.
If their earnings continue to show improvement, then rally may happen faster than expected.
I'd temper expectations until insiders done throwing the baby out with the bathwater.
Great business, very interesting growth stock that nodoby knows about.
Let's see how next Q looks.