Buy CGI at these prices, says Scotia Wealth advisor

The turmoil caused by COVID-19 is pushing companies across the board to beef up their IT infrastructure, which is good news for CGI Group (CGI Group Stock Quote, Chart, News TSX:GIB.A), says Greg Newman of Scotia Wealth, who says investors should be loading up on the stock.

One of the largest tech companies in Canada, CGI is an IT consulting and systems integration business with delivery centres worldwide and an employee base of 70,000. The stock has pretty much climbed out of the hole formed with the market pullback earlier this year but there’s definitely room for GIB.A to grow, especially in the current environment, said Newman, senior wealth advisor with Scotia, who spoke on BNN Bloomberg on Monday.

“I do like CGI. They just be on their Q3, with strong renewals and 96 per cent recurring revenues across all service lines,” Newman said. “The 2020 outlook is a little bit muted here, like most, but we see really nice growth into 2021 as firms reengage in their IT spend. A very strong balance sheet, and acquisitions are a big part of their business model so it's a source of unpriced upside.”

“If you're looking for a software company this is a name that we model growing at 90 per cent earnings per share growth —not a bad growth rate for a not too demanding multiple at 15x 2022,” Newman said.

CGI popped at the end of July when the market got a look at its fiscal third quarter earnings report. The company saw revenue come in at $3.05 billion, which was down 2.2 per cent year-over-year, while adjusted EBIT fell 5.5 per cent to $448.0 million and non-GAAP EPS came in at $1.18 per share.

But those numbers were better than expected, as analysts were calling for $2.99 billion in revenue and $1.12 per share. That helped boost GIB.A to the $94 range, which is still a ways off the $113 high it hit earlier in the year.

CGI management said the road ahead looks favourable for expanding its business organically and through acquisitions.

“Our strong cash generation in the quarter was driven by the quality of our client relationships and delivery excellence. Looking ahead, we believe market and business conditions for our end-to-end services will gradually improve throughout the rest of this year, and we see expanding opportunities for profitable growth through both build and buy,” said president and CEO George Schindler in the Q3 press release on July 29.

Although investors have already taken to tech names like Amazon and Shopify which have benefited from the new COVID-19 reality, Newman said CGI is still a relatively cheap pickup.

“We’re trying to find good companies that are below where they were in February at the highs and this is one that definitely fits that bill. This is a name that we've been adding to all along and it’s still pretty good at these levels,” Newman said.

“There are companies here that have actually benefited by the COVID crisis and this is one of them. And if you can find a name that’s pretty reasonable and hasn't run that much that I think that you want to own it,” he said. “So, we like it. We’re fans.”