CGI Group is an overlooked tech stock, this investor says

Tech stocks have been doing awesome this year despite (or in many cases due to) the COVID-19 pandemic wreaking havoc on numerous sectors of the economy, and that goes for Canadian names in the space, too, with Shopify tearing up the charts and stocks like Lightspeed POS and Descartes Systems posting large gains.

But the same hasn’t been the case for IT consulting firm CGI, whose share price has yet to return to pre-COVID levels. Year-to-date, GIB.A is down 17 per cent, a noticeable departure for a stock that’s been very strong over the past decade.

And while CGI’s business has suffered due to the pandemic — CGI has clients in the manufacturing and retail sectors, for instance, which have been hard hit by COVID-19 —the overall picture is still great, says Madden.

“CGI is Canada's largest IT services Systems Integration consulting outsourcing company. They serve a number of different verticals: government would be their largest, healthcare, energy, financials, manufacturing, retail … it’s very much a global company,” said Madden, speaking on BNN Bloomberg on Thursday. “They're increasingly licensing their own intellectual property and client engagements, and that in our view has favourable long-term margin implications for the company.”

“It’s very much a pandemic- and recession- resistant business model and it should grow earnings per share this year,” Madden said.

CGI’s latest quarter, its fiscal third 2020 which came out in July, saw revenue fall two per cent from a year earlier to $3.05 billion and EBITDA was down 5.5 per cent to $448.0 million. Those numbers were ahead of analysts’ consensus estimates at $2.98 billion and $448 million, respectively. Management said in its Q3 comments that market conditions are likely to pick up over the second half of 2020 and that CGI will be in a growth mode, through both build and buy approaches.

Madden sees the company’s M&A program as CGI’s strength.

“The kicker here is it’s a very successful acquirer,” Madden said. “More recently, it’s been doing a series of small tuck-in or infill transactions, but they do have a history of doing large transformational deals, the last one being in 2012 when Logica put them on the map in Europe in a big way.”

“[George Schindler, CGI’s current CEO] has been in his seat for about three years now and I would imagine he’s going to want to put his lasting stamp on the company via transformational merger or acquisition, and I think you should look for that to meaningfully boost their profitability when it does occur.”

“We’re confident buyers of the stock here,” he said.