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CGI GROUP INC. (Toronto symbol GIB.A; www.cgi.com)is Canada’s largest provider ofcomputer outsourcing services. CGI helps its clients automate routine functions, like accounting andbuying supplies. That makes them more efficientand lets them focus on their main businesses.
CGI follows what it calls a “Build and Buy” strategy. The “Build” part refers to expanding relationships with existing clients and attracting new ones. The company’s long-term outsourcing contracts give it steady, predictable revenue streams. They also let CGI sell these clients other services.
The “Buy” part of the strategy involves making acquisitions. CGI tempers the risk of buying other companies to fuel its growth by targeting firms that enhance its expertise or geographic presence.
For example, in August 2012, CGI completed the largest purchase in its history when it paid $2.7 billion for U.K.-based outsourcing firm Logica plc. As a result, Europe now accounts for 35% of CGI’s revenue, followed by the U.S. (25%), South America (20%), Canada (15%) and Asia (5%).
CGI’s revenue slipped from $3.8 billion in 2009 to $3.7 billion in 2010 (fiscal years end September 30). But thanks to Logica and smaller acquisitions, revenue jumped to $10.1 billion in 2013 and probably rose to $10.6 billion in 2014.
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Buying stocks: $130 million in cash and low debt gives CGI plenty of room for more acquisitions
Earnings soared 141.5%, from $301.4 million in 2009 to $727.7 million in 2013. CGI sold shares to help pay for Logica, so its earnings per share rose at a slower rate of 137.1%, from $0.97 to $2.30.
In the June quarter, CGI booked $2.45 billion of new orders. Its backlog is now $18.8 billion.
Meanwhile, the company continues to repay the cash it borrowed to buy Logica. As of June 30, 2014, its long-term debt was $2.0 billion (or a moderate 17% of its market cap), down 15.1% from $2.3 billion at the end of fiscal 2013. It also holds cash of $131.3 million, or $0.42 a share, which gives it plenty of room for more acquisitions.
CGI continues to rebound from bad publicity over its role as the former lead contractor for the Healthcare.gov website, which lets Americans shop for health insurance under Obamacare.
Visitors had trouble logging on when the site began operating on October 1, 2013, so signups were lower than expected. However, CGI was just one of several firms working on the site, which made it difficult to test the new system.
CGI was our Stock of the Year for 2010 and 2011. We first recommended it as our top choice at $15, which works out to a 153.3% gain. Even after this jump, it trades at an attractive 13.4 times the $2.83 a share it probably earned in 2014.
CGI Group is a buy recommendation of The Successful Investor.
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