Wait for a pullback on CGI Group, this fund manager says

After a superb run during the first half of the year CGI Group (CGI Group Stock Quote, Chart, News TSX:GIB.A) has been trading choppily over the last couple of months.

But there’s probably still upside to be had from the stock, says Christine Poole of GlobeInvest Capital Management. Just wait for a pullback before jumping in.

Montreal-based IT and consulting company CGI Group has been a standout performer on the Toronto Stock Exchange for more than a decade, returning investors a whopping 700 per cent over the past ten years. But the stock ran into trouble after CGI’s latest earnings report in late July, and though it reached a new high of $106.63 by early September, there’s been little sign of upward momentum since.

Poole says the name is fundamentally strong, if a bit on the expensive side.

“We’ve held CGI for a number of years, primarily in our growth-oriented portfolios. It doesn’t pay a dividend so it’s not an income stock. For new client money, we’ve been waiting for a pullback, arguably a place below $100 to build positions,” says Poole, managing director at GlobeInvest Capital, speaking to BNN Bloomberg on Wednesday.

“We still like the long-term outlook for this company. It’s an IT services and outsourcing company. They’re seeing some nice growth in terms of their financial vertical and outsourcing has become a very nice recurring revenue stream, which makes it more defensive,” she says.

Poole says, “You can see that the stock has done quite well. When we first started buying this stock at around $15, the valuation was much lower. Where it used to trade at a discount to its peers, now it’s trading at maybe a slight premium, so that’s why we’re waiting for the pullback to get in.”

Much like a number of other Canadian tech names like Open Text and Constellation Software, CGI is a growth by acquisition story, with the company’s latest purchase being California-based asset-management software and services company Sunflower Systems. The deal will shore up CGI’s position regarding commercial businesses and government entities like universities, government contractors and law enforcement organizations, says CGI management.

“CGI’s merger with Sunflower Systems is aligned to our Build and Buy strategy, providing opportunities to expand our offerings to the public and private sector, and offering IT modernization opportunities aligned with our strategy,” said Tim Hurlebaus, President of CGI’s wholly owned US subsidiary CGI Federal, in a press release in early September.

CGI released its fiscal third quarter financials on July 31, featuring revenue of $3.12 billion, up 6.1 per cent year-over-year, and adjusted earnings of $337.2 million or $1.22 per share, up 8.9 per cent year-over-year. The company’s earnings were in line with analysts’ expectations but revenue came in slightly under the consensus estimate of $3.15 billion.

After the quarterly report, National Bank analyst Richard Tse said that CGI is still a Buy, based on the name’s defensive attributes and growth potential through acquisitions but also through organic growth and margin expansion.

“As we see it, CGI has been running the court building its pipeline in recent years with digital transformation deals. That pipeline of active deals has also been made up of larger engagements and when combined with a consolidation of vendors, it’s creating extended sales cycles,” wrote Tse in a report to clients on July 31.