Cormark analyst Richard Tse says the combination of a big recurring revenue base, a solid backlog of orders, debt repayment, solid cash flow, and a share buyback program, are pointing to upside for CGI Group ((TSX:GIB.A).
Shares of CGI rose yesterday and today after the company reported a first quarter that saw earnings grow by nearly 25%.
In its Q1, 2015, CGI posted adjusted EBITDA of $344.0-million on revenue of $2.54-billion, which compared favourably to the $302.9-million in EBITDA it delivered on a topline of $2.64-billion in last year’s first quarter.
“Our pipeline of new opportunities is expanding, reflecting improving market conditions and growing client recognition of the significant value created by our business enabling solutions,” said CEO Michael Roach.
Tse says he was somewhat surprised that CGI’s stock rose on what was essentially an in-line quarter. But he also believes that the company’s earnings bump is solid evidence that it shouldn’t be trading at a discount to peers such as Leidos and Unisys.
“No doubt, the underlying performance tells us GIB.a/GIB should not be trading at an 18% discount to its peers. Yet, it still does. Bottom line, while revenue may not be growing, earnings are, by close to +14% when the average ex Unisys and Leidos (both had one-offs) is -2%.”
In a research update to clients this morning, Tse maintained his “Buy” rating on CGI Group but raised his one-year target on the stock from $48.00 to $58.00.