Buy CGI Group for growth at a reasonable price, this investor says

Portfolio manager Brian Madden thinks you should be buying Canadian information technology company CGI Group (CGI Group Stock Quote, Chart, News TSX:GIB.A) and not just because of the depressed share price.

Madden says CGI is a tried and true growth-oriented machine.

“We like the stock, we own it and we’d be buyers of it here today,” says Madden senior vice president of Goodreid Investment Counsel, who spoke on BNN Bloomberg on Friday. “It’s an excellent business.”

Montreal-based CGI is Canada’s largest IT services company with international business in systems integration, consulting and business process outsourcing. CGI’s share price took a beating with the rest of the market in late February and mid March with the stock losing about a third of its value over that time span, typical among tech stocks traded in Canada and the US.

And while GIB.A has made up a good chunk of that ground the stock is still 23 per cent off its all-time high of $114.49 set in late January, making it a Buy right now, says Madden.

“What we most like about it is it exemplifies growth at a reasonable price. They’ve managed to grow their earnings at a compound rate of about ten per cent a year over the last five years and even more quickly than that looking out over ten years,” Madden says.

“The stock right now trades at about 17 times earnings, and those earnings forecasts for 2020 have actually been reduced by about a percent and yet remarkably they’re still calling for about one per cent year-over-year earnings growth in 2020.”

“There aren’t that many companies that are going to be able to grow earnings at all, but if they pull that off it’ll be quite a feat,” he said.

CGI reported its second quarter fiscal 2020 results on April 29, beating estimates for profit at adjusted EBIT of $483.2 million, up 6.4 per cent from a year earlier, while coming in-line for revenue at $3.13 billion, up 2.0 per cent year-over-year. Net earnings were $1.26 per share.

Management said the company’s diversified mix of critical services businesses is helping CGI through the COVID-19 era, which has had its impact on client demand.

“The pandemic has created unprecedented business conditions and I am proud of our members’ ongoing commitment to ensuring service continuity for CGI clients in a safe and flexible manner,” said President and CEO, George Schindler in a press release. “Our Q2 performance is a reflection of our resilient business model and our operational excellence.”

Madden says CGI is one to own for the very long term.

“The revenue is highly visible. It’s sticky because of the mission critical nature of the work that they do for their customers. And it’s in backlog so it’s contracted: they’ve got about two years of revenue in backlog,” Madden said. “So, yes, we would be buyers here. We like the pullback.”

CGI noted bookings of $2.78 billion over the second quarter and $11.89 billion over the past 12 months. By the end of March, CGI’s backlog was at $22.99 billion.