Take a pass on pricey CGI Group, this investor says

In a year in which the majority of tech names suffered losses, 2018 turned out just fine for CGI Group (CGI Group Stock Quote, Chart TSX:GIB.A), which finished up 22 per cent. And the Montreal-headquartered IT company has kept the party rolling into 2019, with the stock up over seven per cent year-to-date.

It’s a testament to the market’s faith in CGI, which has proven itself to be a well-run company, says Michael Sprung, who cautions that GIB.A already looks overbought.

“They seem to be making acquisitions on a fairly regular basis and they’re expanding their footprint globally. They’ve done a very good job of managing this company,” says Sprung, president of Sprung Investment Management, to BNN Bloomberg Wednesday.

“It is a little bit priced for that future growth to be continuing, so from my point of view as a value investor it’s not where I would be stepping into at this moment,” he says. “They really have to be able to maintain the momentum, not only in the organic growth but in the acquired growth which they’ve been doing quite successfully for some time.”

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Last week CGI announced an agreement to buy Swedish technology consulting company Acando for $614.7 million. The deal, which gives a 44.2 per cent premium to Acando shareholders as of announcement date, would add another 2,100 employees to CGI’s Northern Europe division which already includes over 8,500 employees.

“By combining CGI’s exceptionally strong position in data-driven digital business and IT transformation practice with Acando’s business consulting and human-centric digital innovation approach, we strengthen our unique blend of skills and capabilities for the benefit of our clients as we pursue profitable future growth together,” stated Heikki Nikku, CGI President of Northern Europe operations.

On January 30, CGI reported its first quarter fiscal 2019 earnings, which featured revenue of $2.96 billion, a 5.2 per cent year-over-year increase, and Adjusted EBIT of $439.2 million, a 7.5 per cent year-over-year increase. Both numbers came in line with analysts’ consensus estimates.

“I do admire the company and it is something that I look at from time to time but it’s always priced at a bit of a premium to where I would consider a place to step in,” says Sprung.