CGI Group is an expensive but exceptional stock, this investor says

It looks like CGI Group (CGI Group Stock Quote, Chart, News TSX:GIB.A) got a bit ahead of itself and has become and expensive stock.

That’s the takeaway from Stephen Takacsy of Lester Asset Management who says that although the stock is pricey, investors could do a lot worse that this a great long-term hold from the Canadian tech sector.

“This is one of our core holdings. We really like CGI,” said Takacsy, president, CEO and chief investment officer at Lester Asset Management, speaking to BNN Bloomberg on Thursday. “It’s one of the largest tech companies listed on the TSX, well-managed global growth. Obviously, it’s expensive. It’s in the index and it’s a really go-to name for Canadian investors.”

“But even though (CGI Group is) expensive by historical standards, it still trades at a hefty discount to a company like Accenture in the US that it often gets compared to…”

“But even though it’s expensive by historical standards, it still trades at a hefty discount to a company like Accenture in the US that it often gets compared to,” he says.

GIB.A has been a stellar performer over the past ten years, including earlier this year where it climbed 27 per cent between January 1 and the end of July. Since then, however, the stock has been trading sideways and at $102 per share is now down a touch from that summer high of $106.

Takacsy says that as the stock’s multiple expands, so does the challenge for CGI to keep growing.

“A company at these multiples has to continue to increase the backlog to have a positive book to bill ratio,” Takacsy said. “They have to continue increasing their margins and to announced sizeable acquisitions for it to continue to command this premium multiple.”

“We’re holding [right now] but we did trim a little bit around these levels, but it’s a good long-term hold. When things get expensive, we do a little trimming at the margin,” he said.

Ahead of CGI’s fourth quarter and year-end results due next week, investors will be looking for stronger results than last time around. Although the company’s Q3 delivered on July 31 met expectations on earnings, revenue came a little under the consensus. CGI reported adjusted earnings of $337.2 million or $1.22 per share, an increase of 8.9 per cent year-over-year. Its top line of $3.12 billion was a shade under analysts’ estimate of $3.15 billion.

Montreal-based CGI is an information technology, systems integration and consulting company with one of the longest histories in the tech space, having gone public back in 1986. Management recently said that industry dynamics are showing more growth potential in the IT field as corporations look to upgrade their infrastructure.

“We’re seeing two things,” said CEO George Schindler in the company’s third quarter conference call in July. “As we move into the middle innings, if you will, of this digitization effort, there are some trailing industries — I would say utilities, government, manufacturing, insurance. And we’re seeing them kind of just jump into the middle innings and doing some of this IT modernization very rapidly but then also introducing in that digitization on top of it. So those are the industries we see as the strongest.”

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