This Canadian technology firm is adapting to fast-changing markets by making acquisitions, aggressively cutting costs and eliminating slower-selling products. It is also adding to its backlog as it sheds a U.S. government contract that was plagued by political interference.
CGI GROUP INC. (Toronto symbol GIB.A; www.cgi.com) is a leading provider of computer outsourcing services. It helps its clients automate certain routine functions, like accounting and buying supplies. That lets companies improve their efficiency and focus on their main businesses.
The U.S. government recently dropped CGI as the lead contractor for the Healthcare.gov website, which lets Americans shop for health insurance under the Affordable Care Act (or Obamacare). Since the site launched on October 1, 2013, visitors have had trouble logging on and evaluating the various plans. As a result, fewer users than expected have signed up.
However, the Obamacare project attracted a lot of political interference, and numerous changes made it harder for CGI to test the system. So Obamacare’s problems are having little or no impact on CGI’s reputation.
For example, National Bank of Canada recently extended its current contract with CGI to 2020. This extension is worth $100 million.
Tech stocks: Cost-cutting measures make room for paying down debt and share buybacks
In its fiscal 2014 first quarter, which ended December 31, 2013, CGI’s earnings jumped 50.8%, to $207.9 million from $137.8 million a year earlier.
Due to more shares outstanding, earnings per share rose 47.7%, to $0.65 from $0.44.
These figures exclude costs to absorb Logica plc, a U.K.-based computer-outsourcing firm that CGI bought for $2.7 billion in 2012.
Starting in fiscal 2015, the company expects to cut $375 million from its annual costs by combining overlapping operations. That’s up from its earlier goal of $300 million. The savings will give it more room to pay down its long-term debt of $2.6 billion (or 23% of its market cap) and buy back shares.
Revenue rose 4.4% in the quarter, to $2.6 billion from $2.5 billion a year earlier. Thanks to Logica, CGI now gets 85% of its revenue from outside Canada. However, if you exclude the positive impact of currency exchange rates, revenue fell 1.9%. That’s mainly because the company has cancelled some of Logica’s less-profitable contracts.
CGI booked $2.8 billion worth of new contracts in the quarter. Its order backlog is now $19.3 billion, up from $18.3 billion a year earlier.
The stock hit an all-time high of $41.47 in November 2013, but the Obamacare problems caused it to fall to $33 in February 2014. It is now at $35.
In the latest edition of The Successful Investor, we look at CGI’s prospects for the coming year and whether its share price is likely to move back up to its highs. We conclude with our clear buy-sell-hold advice on the stock.
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