CGI Group is an underrated cloud-computing play, this investor says

CGI Group (CGI Group Stock Quote, Chart, News TSX:GIB.A) may not have the flash of a Shopify or Lightspeed but it’s a tech name that checks all the right boxes, says portfolio manager John Zechner.

One of the largest IT services companies in the world, CGI conducts out-sourcing and managed services business along with systems integration and consulting. The company is a player in the transition to the cloud occurring in recent years, which is driving up revenues for well-known cloud services providers like Amazon and Microsoft but also has its impact on names like CGI, says Zechner, lead equity manager at J. Zechner Associates, who spoke about CGI on BNN Bloomberg on Monday.

“CGI has done this growth by acquisition strategy that has really worked out,” says Zechner. “Their internal, organic growth is in the low single digits at best, but they've added acquisitions and rolled out their product line effectively.”

“If you look at the area right now there are so many large companies, they're migrating more to the cloud and they're looking for IT solutions and CGI has always provided that,” Zechner said.

CGI was at all-time highs in January before a poorly received earnings report pulled the stock lower, followed by the wider market drop in February and March. Altogether, GIB.A fell from $114 per share to as low as $70 before rebounding to the $85-$90 range where it’s been since late April.

Zechner said CGI will look even better once it finds the next big acquisition.

“They're running into a little bit more competition because they’ve become so big, but their valuation is attractive and they haven't done really a major acquisition for a couple of years now,” Zechner said. “Maybe the valuations aren't that attractive for them —and they've paid down some debt in the interim.”

“Their balance sheet is in great shape, they’ve got lots of excess cash, they’re generating free cash flow which has always been the nice thing with their strategy,” he said. “They bring these assets in, they assimilate them and try to bring up the margins to their own level and then they pay down the acquisition debt.”

“It looks good on its own, and if you could augment with another acquisition which they're probably looking at — they did their last one in Europe so maybe they're looking a little bit more globally — I think it's worth holding,” Zechner said. “We’ve held it for a number of years and I continue to hold the name. It’s not the Shopify kind of booming story but it's growth, it's decent valuation and I like their core business.”

Last week, RBC Capital raised its target on CGI to $110.00 and reiterated its “Buy” rating for the stock. At current levels, that target would represent a return of 25 per cent. CGI’s latest quarter came in late April where the company’s Q2 featured revenue up two per cent to $3.13 billion and adjusted EBIT up 6.4 per cent to $483.2 million.