Technology stocks had a bounce-back day on Wednesday but the road travelled over the past year has been rocky for the sector, making it hard for investors to find comfort in owning tech names. But portfolio manager Chris Blumas has one good place to park your money within the space: Canadian IT consulting giant CGI Inc (CGI Inc Stock Quote, Charts, News, Analysts, Financials TSX:GIB.A).
“This is a very, very shareholder friendly company and in terms of their footprint they have a global opportunity set in terms of which they operate and as more and more companies are digitizing and going more digital, CGI is front and centre with their outsourcing and consulting services,” said Blumas of Raymond James Investment Counsel, who spoke on BNN Bloomberg on Wednesday where he named CGI as one of his Top Picks for the year ahead.
Montreal-based CGI is Canada’s largest technology company with a base of 84,000 consultants around the world and delivering a lineup of IT and business consulting services such as systems integration, managed IT and business process services and IP solutions.
Digital transformation across any number of industries was already ramping up before the pandemic struck but with hybrid and work-from-home becoming more mainstream and on-shoring and supply chain concerns dominating the discussion these days, CGI’s IT consulting services are well-positioned to take advantage of the macro trends.
“In terms of a company having the wind at their backs, they’ve definitely got that,” Blumas said. “And in terms of their capital allocation they’re very strong with their acquisitions and buybacks.”
“The company doesn’t pay a dividend so it isn’t good for income-seeking investors, but in terms of the valuation it’s very attractive at about 16x earnings and a free cash flow yield greater than seven per cent. So, it’s a defensive [stock] for a tough market,” he said.
With a $23 billion market cap, CGI has seen a sharp drop in share price over the first half of June, losing nine per cent in that time span, while the stock is now down about 12 per cent over the past 12 months. GIB.A has given up all of its COVID gains and then some, while at the same time not dropping nearly as far as some of the more high-flying growth names in the space. Shopify, for instance, is down 65 per cent over the past year while the broader TSX Information Tech Capped Index, which includes both CGI and Shopify, is down 37 per cent. The tech-heavy US-focused Nasdaq Index is down about 20 per cent.
CGI last reported earnings in late April when its second quarter fiscal 2022 featured revenue up 6.2 per cent year-over-year to $3.27 billion and adjusted EBIT up 7.7 per cent to $523.6 million. Diluted EPS for the quarter was $1.53 per share, up 14.2 per cent from a year earlier.
“In the second quarter of fiscal 2022, we delivered on our profitable growth plan with double digit increases year-over-year in both revenue and EPS,” said George D. Schindler, President and CEO, in a press release.
“Across our end-to-end portfolio of services, demand remains strong as clients continue to turn to our talented teams to help them transform their digital value chains. This robust demand environment, and our recently announced mergers, will continue to create new shareholder value in the second half of the year and beyond,” Schindler said.
At the quarter’s end, CGI said its backlog stood at $23.144 billion, representing 1.9x revenue and up slightly from a year earlier, with the majority of that business made up of long-term managed services and digital transformation contracts. Bookings were down slightly to $3.316 billion.
The company saw its highest growth over the quarter coming from its Asia Pacific business, which saw revenue climb by 20 per cent. Canadian business was up 11.6 per cent and US Commercial and State Government was up 17.6 per cent.
In its management commentary on the quarter, CGI said its IP bookings were very strong at an 89 per cent increase on a constant currency basis.
“As macroeconomic pressures continue to expand, clients are responding by increasing their investments in digitization, in part to reduce costs in other areas of their operations. CGI’s proprietary research quantifies this. When we ask clients about their budget plans for the next year, nearly 80% of respondents indicated they plan to sustain or increase their IT budgets,” said Schindler in the second quarter conference call.