CGI GROUP INC. $24 (Toronto symbol GIB.A;Aggressive Growth Portfolio, Manufacturing &Industry sector; Shares outstanding: 307.7 million;Market cap: $7.4 billion; Price-to-sales ratio: 1.5; No dividends paid; TSI Network Rating: Extra Risk;www.cgi.com) is Canada’s largest provider of computer outsourcing services. CGI helps its clients automate routine functions, like accounting and buying supplies. That makes them more efficient and lets them focus on their main businesses.
CGI was our #1 stock pick for 2010 and 2011.
Aiming for global growth
In the past few years, the company has used acquisitions to expand outside of Canada. For example, it recently paid $2.7 billion for Logica plc,a U.K.-based firm that provides computer outsourcing services in 36 countries. Thanks to purchases like this, CGI is more geographically diversified: it now gets 47% of its revenue from the U.S., 36%from Canada and 17% from the rest of the world.
The stock has fallen from its recent peak of $27in September 2012 on fears that slow growth in Europe will hurt Logica’s earnings. However, CGIhas a long history of integrating new companies. It still expects Logica to increase its earnings per share by 25% to 30% in the first year.
CGI’s revenue rose 3.2%, from $3.7 billion in2008 to $3.8 billion in 2009 (fiscal years end September 30). Unfavourable foreign exchange rates cut its revenue by 2.4%, to $3.7 billion, in 2010.However, revenue rose 13.2% to $4.2 billion, in2011 after the company purchased Stanley Inc.,which provides outsourcing services to military and civilian agencies of the U.S. government. Revenue rose a further 13.0% in 2012, to $4.8 billion.
Strong acquisitions cut write down risk
Earnings rose 46.5%, from $299.1 million in2008 to $438.1 million in 2011. CGI prefers to use its excess cash to buy back shares instead of paying a dividend. Due to fewer shares outstanding,earnings per share jumped 72.8%, from $0.92 in2008 to $1.59 in 2011. Costs to integrate Logica pushed down earnings to $131.5 million, or $0.48 ashare, in 2012. If you disregard all unusual items,earnings per share would have risen 4.2%, from$1.44 in 2011 to $1.50 in 2012.
CGI borrowed most of the cash it needed to buy Logica. That raised its long-term debt to $3.2 billion on September 30, 2012, from just $109.7 million ayear earlier. Even so, that’s still a manageable 43%of its market cap.
The company’s acquisitions have also raised its goodwill to $5.8 billion, or a high 78% of its market cap. However, Logica and Stanley are both well established,profitable businesses. That cuts the risk of a major write down.
Low p/e adds appeal
The addition of Logica should push up CGI’s earnings to $2.05 a share in fiscal 2013. The stock trades at 11.7 times that estimate. Earnings could reach $2.44 a share in 2014, and the stock trades at just 9.8 times that forecast.
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