It’s time to reload on CGI Group stock, National Bank Financial says

National Bank Financial analyst Richard Tse is keeping the faith on IT consulting and systems integration company CGI Group (CGI Group Stock Quote, Chart, News TSX:GIB.A) after the latest quarterly earnings spooked investors and sent the stock down sharply in trading on Wednesday.

Tse issued an update to clients on Wednesday where he reiterated his “Outperform” rating and C$120.00 target for CGI, which represented a projected 12-month return of 12 per cent at the time of publication.

Montreal-based CGI announced its first quarter fiscal 2020 financials on Wednesday, reporting revenue of $3.05 billion, up from $2.96 billion a year earlier, and earnings of $290.2 million or $1.06 per diluted share, down from a profit of $311.5 million or $1.11 per diluted share a year earlier.

In its commentary, management pointed to $16.5 million in acquisition-related and integration costs and $28.2 million in restructuring costs as cause for the drop in earnings. Management also said that a change in buying behaviour on the part of its customers had resulted in deals becoming smaller in size and for shorter terms.

“I am pleased with this quarter’s results of continued profitable growth and strong cash generation as we successfully execute our build and buy strategy,” said President and CEO George Schindler in a press release. “We are experiencing strong demand for our end-to-end services and remain an active consolidator through mergers and acquisitions.”

CGI reported bookings of $2.75 billion for the Q1, down 19 per cent from the previous quarter, and $12.36 billion over the last 12 months, with the backlog at quarter’s end standing at $22.29 billion.

CGI, which finished 2019 up 30 per cent and last week reached an all-time high of $114.49 per share, closed on Wednesday down to an even $104.00 per share.

Tse called the quarterly results for the most part in line with expectations, where the analyst had forecasted $3.11 billion in revenue ($3.14 consensus) compared to the actual top line of $3.05 billion. On adjusted EBIT, Tse was forecasting $468 million (consensus $472 million) whereas CGI hit $474 million. Adjusted EPS of $1.23 per share was a hair better than Tse’s $1.21 estimate and the Street’s $1.24 per share.

In his report, Tse pointed to overall spending softness in the IT services sector as having an impact on CGI’s bookings, but in general, the analyst spoke of a number of pluses about the company going forward, including the fact that CGI’s margins remain strong, it’s still driving organic growth, its IP/Digital segment is still expected to rise in contribution to overall revenue and, finally, the company is still spinning a tonne of cash with $465 million in cash from operations, up 19 per cent year-over-year and 15 per cent quarter-on-quarter.

“Bottom line, our thesis on GIB.a/GIB is unchanged,” wrote Tse. “We continue to believe CGI is moving up the value chain with an increasing proportion of revenue from IP and digital (higher margin), organically built and acquired. We like CGI’s defensive (recurring cash flow and de-leveraging) attributes and the obvious optionality from M&A particularly given a consistent record of execution.”