CGI is a winner of a stock, this investor says

Nothing succeeds like success, as they say, and that certainly applies to Canadian IT consulting giant CGI (CGI Stock Quote, Chart, News, Analysis GIB.A), whose performance over the past decade has been a marvel to behold. On its own, that should be enough to keep you interested in the stock, says Jason Del Vicario of Hillside Wealth Management, who says CGI’s business model is hard to argue with.

“I saw a table the other day that showed the highest returning stocks on the TSX over three decades and CGI was the number one performing stock, so that should tell you really everything that you need to know,” said Del Vicario, portfolio manager at Hillside, speaking on BNN Bloomberg Thursday.

“This is a company that we have owned in the past but we don’t own them now. They have consistently generated high returns on invested capital, in and around the 15 to 25 per cent range and it’s a Canadian success story in the consulting space,” Del Vicario said.

“Consulting is a great business because it is capital light, it is asset light, meaning that they don’t require a lot of capital to grow. And so this is an attractive business model to us,” he said.

But even with its past success, CGI has had trouble getting above water in 2020 where it currently trades at negative six per cent for the year. That’s a marked contrast to the general theme this year which has seen tech companies climb higher as investors load up on not just growth names but businesses that would benefit from the work-from-home environments imposed by COVID-19, with tech being a prime beneficiary.

Apparently not so with GIB.A, which has so far been unable to take back ground lost in the pullback of February/March. In fact, CGI’s slide started before then, with the company’s quarterly earnings report delivered in late January. There CGI’s profits slipped due to acquisition-related restructuring and integration costs, falling to $290.2 million from $311.5 million a year earlier. CGI’s revenue was up to $3.05 billion from $2.96 billion a year earlier.

CGI’s stock dropped almost ten per cent with the fiscal Q1 news, which was followed less than a month later with the general market fall due to COVID-19.

It’s clear CGI’s business has been impacted by COVID-19, as revenues have declined on a year-over-year basis over the past two quarters. The company’s fiscal Q4, delivered on November 11, saw CGI’s topline drop by 1.1 per cent while adjusted EBIT stayed flat. For the full fiscal 2020, CGI’s revenue was a hair higher than 2019 at $12.16 billion, up 0.4 per cent, while adjusted EBIT grew by 2.1 per cent to $1.863 million.

In his fourth quarter comments, president and CEO George Schindler said the restructuring actions CGI took in 2020 are now completed and thus net earnings should increase going forward. Schindler insisted that despite the slowdown in 2020, CGI — which finished its fiscal Q4 with a backlog of $22.67 billion or 1.9x annual revenue and had bookings of $11.85 billion over the full fiscal year — has a healthy pipeline of opportunities up ahead.

“CGI ended the fourth quarter and fiscal year 2020 with strong results when considering the circumstances our team had to adapt to in order to deliver on our commitments to each of our three stakeholders. Our performance reflected the talent and dedication of our consultants, the relevance of our end to end services and the resilience of our business model,” Schindler wrote in a press release.

Last month, CGI got a thumbs up from Raymond James where analyst Steven Li in a November 12 update to clients gave the stock an “Outperform” rating and raised his target price for CGI from $102.00 to $106.00, which at the time of publication represented a projected one-year return of 14 per cent.

Earlier this year in a review of CGI’s third quarter financials, National Bank analyst Richard Tse said CGI’s relatively lacklustre performance this year won’t be a long-term issue.

“Short term, while we still see some uncertainties regarding the impact from COVID and the pace of the re-openings of economies, [CGI’s fiscal third quarter] underscores the relative resilience in CGI’s business model. For longer-term investors, we believe IT Services will be one of the segments in tech to bounce back faster and in particular for companies that can redirect their service offerings into areas of demand,” Tse wrote in an July 29 report.

Del Vicario seems to agree that CGI will get back to its winning ways.

“This is a company that can keep increasing shareholder wealth over the long term. If we were to look at a long term chart of CGI, you’ll see that it is going from lower left to upper right,” Del Vicario said. “We have a strict stop loss discipline so at some point we were stopped out of the name. And, often we will buy back.”