Interested in Canadian IT consulting company CGI Group (CGI Group Stock Quote, Charts, News, Analysts, Financials TSX:GIB.A)?
There’s good reason to be, as the stock has pulled back from highs set over the back end of last year, meanwhile the company seems to be firing on all cylinders operationally, showing strong revenue growth in recent quarters.
But portfolio manager Andrew Pyle is having none of it, saying CGI is likely to have a limited growth potential in the faltering IT space.
“In terms of multiples, CGI is not as cheap as perhaps one would think,” said Pyle investment advisor at CIBC Wood Gundy, who spoke on BNN Bloomberg on Tuesday. “I don’t think the stock is extremely cheap at this point and I do think we’re going to see headwinds in this segment of the market.”
Montreal-based CGI is definitely the grandaddy of Canadian tech companies, with roots trailing back to the mid-1970s and now sporting a worldwide employee base of 80,000. The company delivers strategic IT and business consulting services, systems integration and business process services, with revenue topping $12 billion last year.
And the company is growing both organically and through acquisitions. By the close of its fiscal 2021 (year end September), CGI reported cash from operations up from $1.9 billion to $2.1 billion, while its backlog of business grew from $22.7 billion to $23.1 billion.
Inorganically, CGI last month announced a major deal to buy French digital services company Umanis for roughly $436 million. That deal would see the company gain a 70.6 per cent stake in Umanis at first, followed by an offer for the remaining interest.
CGI said the acquisition will give it a larger European footprint where the company’s end-to-end capabilities will support European businesses in their digital transformation.
“The combination of CGI’s operations and those of Umanis will further deepen our presence and positioning across Western and Southern Europe. This transaction is consistent with the metro market merger element of our Build and Buy strategy for delivering profitable inorganic growth, while acting as a catalyst for future organic growth,” said George Schindler, CGI President and CEO, in a March 11 press release.
The Umanis deal didn’t seem to influence CGI’s share price, however, which continued on its downward trek, having now gone from about $115 per share as of last September to now between $100 and $105 per share. Previously, GIB.A had taken a while to gain back all of its losses suffered in the early part of the pandemic but had added a few dollars per share by last summer before the pullback. With a market cap around $25 billion, CGI’s shares come with no dividend.
But Pyle says there’s a more dismal growth period ahead which will impact CGI.
“Depending on who you talk to, growth forecasts for Canada, the United States and Europe are getting marked down and probably will continue to get marked down as economists start building in a much higher rate profile than what we were anticipating three to four months ago,” Pyle said.
“So in that light, I think at this point I would be looking away from CGI. I think if we had it in the portfolio, which we do not, we’d be looking to cut that position back,” he said.
CGI reported its first quarter fiscal 2022 financials in early February, where revenue grew by 2.4 per cent year-over-year to $3.09 billion and EPS was up 12.9 per cent to $1.49 per share. The company’s backlog stood at $23.58 billion or 1.9x annual revenue.
“CGI is off to a strong start in fiscal 2022 with accelerating revenue growth, strong bookings, and double digit EPS accretion” said Schindler in a press release. “With a net increase of 6,000 employees year-over-year, our plan remains to deliver revenue growth and double digit EPS accretion for the year.”
One fan of the company is National Bank Financial where analyst Richard Tse gave the stock an “Outperform” rating after the Q1 numbers were released. Tse said with solid financials, the quarter featured expanded EBIT margins, up 50 bps even amidst a challenging labour market.
“CGI has the ability to pull a number of operating levers to preserve margins under a tight labour market. It would appear CGI accessed those levers in fiscal Q1 with utilization rates that were HIGHER than pre-pandemic levels with an increasing mix of higher-margin revenue (IP), increased use of offshore delivery and pricing increases available under contract. But while that operating prowess is positive, equally important is growth and on that note, we believe there is also growing momentum,” wrote Tse in a February 2 report to clients.
With his maintained rating, Tse also reiterated a $135 target price, which at the time of publication represented a projected one-year return of 20.3 per cent.