Ahead of Q1 earnings, Cantor Fitzgerald's Liston maintains BUY on CGI Group

CGI Group management, says Cantor Fitzgerald analyst Tom Liston, has a history of increasing the margins of their acquisitions from the low single digits to the

Research in Motion, which recently stole back the title of Canada’s most valuable tech stock, is all over the headlines this week because of the launch of its BlackBerry 10 platform tomorrow in New York.

But the company that briefly held the title, CGI Group (TSX:GIB.A), also has news tomorrow, as it will report its Q1 earnings.

Cantor Fitzgerald analyst Tom Liston points out that this will be the first full quarter of contribution from CGI massive acquisition of Logica, which closed late last summer. Liston says that for the Logica deal to really make sense, it need to have greater than 6% EBIT margins. CGI Group management, he says, has a history of increasing the margins of their acquisitions from the low single digits to the “blended mid-teens range”.

Liston says he has full confidence that CGI will dramatically improve Logica’s profitability, but it might take longer than some expect because of the sheer size of the acquisition. In a research update to clients this morning, Liston maintained his BUY rating and $28.50 target on CGI Group.

CGI Group was founded in Montreal in 1976. The Company’s name is an acronym for Consultants to Government and Industry. Midway through 2010, CGI picked up Stanley, an Arlington, Virginia based systems integrator for a billion dollars. But the company was just getting started; on August 20th, CGI completed the largest acquisition in its history, picking up London-based Logica Plc, a company that was actually larger CGI, for $2.64-billion. CGI Group now ranks as the sixth largest independent information technology and business process services firm in the world.

Liston says he expects CGI quarterly revenue to come in at $2.332 billion, which is lower than the consensus median of $2.482 billion. He thinks EBIT will also be lower than consensus, at $195.9 million. He thinks Adjusted EPS will hit $0.45, which matches the street’s consensus.

Liston’s price target is based on a 12× his expectations for fiscal 2014 earnings. Shares of CGI Group on the TSX closed today down .6% to $24.29.

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