2020 was a self-described tough one for Canadian IT services and consulting heavyweight CGI (CGI Stock Quote. Chart, News, Analysts, Financials TSX:GIB.A) which ended the year down seven per cent. And while the longer history of the stock would seem to say last year was a blip, the path to further growth looks challenging, according to portfolio manager Kim Bolton.
“CGI is very competitive in the IT services sector when it comes to infrastructure and applications, relationship building and software-based solutions, and we follow CGI very, very carefully as we do a lot of the players in the IT services sector,” says Bolton, president of Black Swan Dexteritas, who spoke on BNN Bloomberg on Friday.
“On client feedback, we get it from Gartner Research, which is the world’s biggest IP research company, and they point to some of the challenges for CGI when it comes to recommending reinvest opportunities for their clients,” Bolton said.
This week, CGI announced a brand update, where the company went with the tagline “Insights you can act on,” focusing its message on how its clients can create value and deliver business outcomes through harnessing the power of technology. CGI said the new branding marks a milestone for the company in its 45th year in business.
“Today’s brand refresh launch recognizes CGI’s position as a leading advisor to clients, and our commitment to putting their aspirations at the centre of our services,” said Julie Godin, Co-Chair of the Board & Executive Vice-President, Strategic Planning and Corporate Development at CGI, in a press release.
“With the refresh of our brand identity including new tagline, we reinforce our rich history as a leading IT and business consulting services firm, our deep knowledge-base of client insights, and the collective expertise of our 76,000 consultants and professionals located in 400 locations worldwide,” Godin wrote.
CGI has seen its business get hit by COVID-19 as companies scaled back their IT spending for 2020. The company’s fiscal fourth quarter, reported on November 11 saw revenue come in flat at $12.16 billion for the fiscal year compared to 2019 while adjusted EBIT was up 2.1 per cent year-over-year to $1.863 billion. Net income decreased by 11.5 per cent for the year.
At the same time, CGI saw bookings for its fiscal fourth quarter climb to the highest its been over the last eight quarters at $3.47 billion. CGI has the US government as its biggest client but over half of its business is in the private sector.
In a letter to shareholders in December, the company called 2020 an unprecedented year.
“The pandemic has had a devastating impact on public health, with a ripple effect on economies around the world. Nothing in our 44-year history has had such far-reaching impacts on our people, our clients and our operations,” CGI said.
The company said it stayed resilient during the tough times and the still-strong quarterly results show it.
“This is thanks to our proximity-based model, which embeds operations within clients’ metro markets, a balanced revenue mix by economic sector at the Company level, and a good equilibrium between managed services and project revenue that stands at 60%-40%. However, living through this pandemic led us to reinforce our resilience by accelerating the diversification of our revenue mix by economic sector, not only at the Company level but also at the metro market level,” CGI wrote.
But Bolton thinks there may be better options in the Information Technology sector, including one of his top picks for the upcoming 12 months.
“[CGI’s] booking services demand is very strong but the conversions have slowed and I think that’s what’s sort of holding back the stock,” Bolton said.
“Infosys is a big India-based IT services company and there’s Epam which is actually out of Belarus and it’s a fascinating company, but the one we particularly like (and it’s rich) is Accenture,” Bolton said. “Accenture is just the leader and it’s one of our top picks.”
Some would beg to differ on CGI, however, including National Bank analyst Richard Tse, who last week picked CGI as one of his best bets for the year ahead. Tse said after the year we’ve had, 2021 will see many of CGI’s customers and prospects move ahead with their former initiatives with a recovery in bookings.
“As a market segment, we believe IT Services will be one of the segments in tech to bounce back faster on the other side,” Tse wrote in a January 12 report.
Tse reiterated his “Outperform” rating for GIB.A and $115 target, which at the time of publication represented a projected return of 14 per cent.
Last week also saw Raymond James analyst Steven Li maintain his “Buy” rating on CGI with a target of $106 per share, representing at press time a return of five per cent.