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CGI Group is the Rodney Dangerfield of tech stocks, this portfolio manager says

BlackBerry Rodney Dangerfield

It’s tough being a Canadian tech company sometimes.

Not only are you competing for attention with the much bigger Amazons and Microsofts of the world but even on our home turf you’ve got Shopify and BlackBerry hawking their e-commerce and cybersecurity wares, products perhaps a bit sexier than, say, IT consulting, the purview of Montreal-based CGI Group (CGI Group Stock Quote. Chart TSX:GIB.A, NYSE:GIB).

That’s too bad, says Brian Madden of Goodreid Investment, who argues that even after a long and proven history of success, GIB.A still doesn’t get its props.

“It’s a company that gets scant respect from sell-side analysts —I think it has about 12 Buys, six Holds and a handful of Sells— and the reason why it’s the Rodney Dangerfield of tech stocks is because the organic growth rate is fairly tepid at between one and three per cent,” says Madden, senior vice president and portfolio manager at Goodreid, to BNN Bloomberg. “[But] that has been accelerating recently and their tuck-in strategy has also been working nicely, where they buy niche companies to add capabilities or to fill in a geographic void, and that’s helping to bolster their organic growth.”

“It’s kind of the un-tech tech stock. It really shook off this tech wreck, the huge rotation from growth to value that we saw since last summer, as exemplified by some of the leading US technology stocks,” he says.

CGI, which just last month acknowledged a 20-year tenure on the New York Stock Exchange, has been a solid performer for a good decade. Last year, it was one of only a handful of Canadian tech stocks to make it through the year in the black, posting a return of 22 per cent.

Meanwhile, investment bankers GMP Securities recently tapped CGI as one of its Best Ideas for 2019, in part due to the company’s acquisition track record.

“CGI continues to signal a steady diet of mid-sized targets (less than $500 million) is available, with a maximum capacity of one to two per month; and while valuation expectations for transformational acquisitions remains high, management said opportunities could surface in the coming quarters and years. We continue to appreciate CGI’s discipline here,” said GMP analyst Deepak Kaushal recently.

CGI last reported its quarterly earnings in November where it posted revenue of $2.8 billion, up 7.3 per cent year-over-year, and earnings that beat expectations, coming in at $1.09 per share versus the expected $1.07 per share.

“We own it and continue to like it,” says Madden. “The valuation has crept up — it trades at about 18x earnings — but it’s quite profitable, earning a high-teens return on shareholders’ equity. And it rose fairly quickly and consistently, as well, with about a nine per cent CAGR over the last five years or so.”

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About The Author /

Jayson is a writer, researcher and educator with a PhD in political philosophy from the University of Ottawa. His interests range from bioethics and innovations in the health sciences to governance, social justice and the history of ideas.
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