Canadian IT stocks are undervalued, Desjardins says

Was that the bottom? Desjardins analyst Jerome Dubreuil thinks that Canadian IT stocks are ready to catch up to their American peers.

As reported by the Globe and Mail, Dubreuil January 30 issued a report in which he said Canadian IT stocks may have bottomed in the fourth quarter of 2023.

“The largest global peers in the IT services sector currently trade at 0.5 times below the sector’s EV/FY2 EBITDA spread vs the S&P 500,” he said. “Amid uncertain macroeconomic conditions, we like the sector’s defensive attributes as companies seeking cost optimization often rely on technology investments. Moreover, the sector’s nimble business models and robust free cash flow generation add to its attractiveness. We believe an improvement in companies’ growth prospects could serve as a key catalyst for the sector’s valuation to revert to its historical average spread with the S&P 500.”

Dubreuil likes Converge Technology Solutions (Converge Technology Solutions Stock Quote, Chart, News, Analysts, Financials TSX:CTS), which he today raised his price target on from $5.00 to $6.00.

The analyst also rates CGI Group (CGI Group Stock Quote, Chart, News, Analysts, Financials TSX:GIB.A) a buy. He raised his target on GIB from $154 to $163.

“Global peers’ results so far this earnings season signal further challenges in revenue growth for IT services companies under our coverage given the ongoing challenges of prolonged sales cycles and difficulties in converting pipelines into actual sales,” the analyst added. “Despite this, large-cap IT services companies are breaking 52-week highs, likely due to the general expectation among companies that have reported thus far that revenue growth has now bottomed. We expect companies to continue discussing their respective generative AI monetization opportunities as investors still assess the size of this opportunity. We continue to like the sector’s attractive attributes and we find current valuations reasonable.”