Why is CGI’s stock doing so poorly?

Already having difficulty pulling up to even for the year, Canadian IT company CGI (CGI Stock Quote, Chart, News TSX:GIB.A) has dropped off even further as of late. And in a climate that seems to be favouring tech stocks, what’s the story on CGI’s poor performance?

For much of the past decade, global IT consulting and systems integration company CGI has been a winner of a stock to own, returning over 600 per cent between January 2010 and January 2020. But this year has been an outlier for the obvious reason that COVID-
19 has disrupted the company’s business. Revenue was down 2.2 per cent year-over-year in CGI’s latest quarter to $3.05 billion and adjusted EBIT fell 5.5 per cent to $448.0 million.

“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 a press release for the company’s fiscal third quarter 2020, delivered in late July.

“CGI Group, you cannot go wrong if you invest for the long term, but in this environment the fund flows are going towards the companies which have a much higher organic growth rate, especially in the technology side…”

It’s that lack of growth that has kept CGI at bay in a year where many tech stocks are booming, according to portfolio manager Andrey Omelchak of LionGuard Capital Management.

“CGI Group, you cannot go wrong if you invest for the long term, but in this environment the fund flows are going towards the companies which have a much higher organic growth rate, especially in the technology side,” Omelchak said, speaking on BNN Bloomberg on Wednesday.

“CGI is experiencing some hiccups. It’s much more difficult to do installations in this environment, to operate on-premises, to have some of their solutions. It’s much more difficult,” he said. “And therefore you’re not seeing the type of growth profile that you would expect from a technology company which provides a core service for a number of industries.”

Omelchak said the downturn is likely temporary, with business expected to pick up once the pandemic is over. That may take some time, though, and Omelchak says there might be a few more rough quarters ahead for CGI.

“Once things come back, they’re probably going to come back with a vengeance and I would definitely be accumulating CGI as it is it is one of the best companies on a risk adjusted return basis, as well,” Omelchak said. “That’s instead of chasing some of those high flying companies which trade at a very high multiple of sales where things can also change quite drastically.”

The sentiment is echoed by RBC Capital analyst Paul Treiber who earlier this month maintained his “Buy” rating on CGI with a $110.00 target price, implying a projected one-year return of 19.4 per cent.

Ahead of CGI’s upcoming fiscal fourth quarter results, the company’s EPS in its previous quarter was $1.18 per diluted share, down from $1.22 per share a year earlier, while bookings were $2.841 billion compared to $2.951 billion a year ago and the company’s backlog at the end of the Q3 stood at $22.295 billion versus $22.418 billion a year ago.