CGI Group can improve Logica’s margins, says Cantor Fitzgerald

Cantor Fitzgerald analysts Tom Liston and Justin Kew say keep a close eye on CGI Group’s (CGI Group Stock Quote, Chart, News: TSX:GIB.A) margins.

CGI will be reporting its Q2, 2013 results tomorrow morning before the market open, and the Cantor Fitzgerald analysts are a little less optimistic than the street consensus. The pair expect CGI will earn $213.8-million, or $0.45 a share on revenue of $2.555 billion. The street thinks CGI will earn $239.6-million, or $0.49, on revenues of $2.559 billion.

Liston and Kew say their estimate for CGI’s core EBIT margin in Q1 was approximately 14%, which would mean that Logica’s EBIT margin was in the 4.5% range. The analysts believe that Logica’s margins need to be more than 6% for the acquisition to deliver a moderate payback. But they point out that CGI’s management has a history of increasing EBIT margins from its acquisitions, and believe they are on pace to do so with Logica. In a research update to clients this morning, Liston and Kew maintained their BUY rating and $30.50 target on CGI Group.

CGI closed the $3.3-billion acquisition of London-based IT company Logica last August. The move vaulted the company ahead of BlackBerry as Canada’s most valuable tech stock, a title the companies have since traded off several times.

Liston and Kew note that CGI’s announced bookings in the quarter were $390-million, which was up significantly from $260-million in Q1. While this is a positive development, the analysts say it must be tempered by the fact that announced deals have less correlation to actual bookings than they have had in previous years.

Shares of CGI Group on the TSX closed today down .9% to $27.03.