CGI GROUP INC. $48(Toronto symbol GIB.A; AggressiveGrowth Portfolio, Manufacturing & Industry sector; Sharesoutstanding: 313.4 million; Market cap: $15.0 billion; Priceto-sales ratio: 1.5; No dividends paid; TSINetwork Rating: ExtraRisk; www.cgi.com) is Canada’s largest computer-outsourcingprovider, helping its clients automate routine functions likeaccounting and buying supplies. That improves their efficiencyand lets them focus on their main businesses.
< p>Government agencies supply 33% of CGI’s revenue, followedby manufacturers and retailers (23%), banks and financial serviceproviders (20%), telecom firms and utilities (15%), and healthcare businesses (9%).
< p>The U.S. federal government is the company’s largest singleclient, accounting for around 14% of its revenue.CGI follows what it calls its “Build and Buy”strategy.
< p>The “build” part refers to expanding relationshipswith current clients and attracting new ones. Thecompany’s long-term outsourcing contracts give itsteady, predictable revenue streams and let it sellother services to these customers.
< p>The “buy” part involves making acquisitions.CGI tempers the risk of buying other companies tofuel its growth by targeting firms that complementits expertise or help it expand geographically.
< p>The company completed the Logica deal, itsbiggest to date at $2.7 billion, in August 2012.Logica greatly expanded CGI’s internationaloperations. The company now gets 29% of itsrevenue from the U.S., 15% from Canada, 14%from the U.K., 12% from France, 8% from Sweden,6% from Finland and 16% from other countries.
< p>Logica deal sent revenue soaring
< p>Thanks to Logica, the company’s revenue jumped181.3%, from $3.7 billion in 2010 to $10.5 billionin 2014 (fiscal years end September 30).Earnings rose 19.9%, from $362.8 million in2010 to $435.1 million in 2011. Per-share profitsgained 27.4%, from $1.24 to $1.58, on fewer sharesoutstanding.
< p>Costs to integrate Logica cut CGI’s 2012 earningsto $0.48 a share (or a total of $131.5 million).However, its profits rose to $1.44 a share (or $455.8million) in 2013 and to $2.69 a share (or $859.4million) in 2014. Excluding unusual items, per-shareearnings rose 21.7%, to $2.80 in 2014 from $2.30 in2013.
< p>The company mainly uses other firms’ computersand software in the systems it designs for itscustomers, so it spends little on research anddevelopment.
< p>CGI is using its improving earnings to repay thecash it borrowed to buy Logica.
< p>As of June 30, 2015, the company’s long-termdebt was $1.8 billion (or a low 12% of its marketcap), down 45.0% from $3.2 billion at the end offiscal 2012. It also held cash of $264.7 million, or$0.84 a share, which gives it plenty of room to keepexpanding.
< p>Growing orders, backlog cut risk
< p>Meantime, CGI’s strong reputation continues tohelp it win new contracts.
< p>In the year ended June 30, 2015, CGI won $10.8billion of deals (58% extensions and renewals, 42%new business), up 2% from a year earlier. Its orderbacklog now stands at $19.7 billion, which is equalto 1.9 times its annual revenue.
< p>The company is also finding new ways to cut itscosts. It recently announced a new plan to make itsoperations more profitable in Canada, the Netherlandsand Sweden. CGI will spend $60 million onthis plan over the next six months.
< p>CGI doesn’t pay a dividend because it prefers touse its excess cash flow to fund acquisitions and paydown debt. However, it is an aggressive buyer of itsown shares.
< p>The company’s current authorization lets it buyback up to 19.05 million of its class A shares, or10% of the total outstanding, by February 10, 2016.It has already repurchased 6.3 million shares.
< p>Buybacks raise earnings per share, and give theremaining shareholders a larger ownership stake.
< p>Big recovery after Obamacare setback
< p>The company was the lead contractor for thehealthcare.gov website, which lets Americans shopfor health insurance plans under the Affordable CareAct (or Obamacare).
< p>Problems with the site’s launch in late 2013 hurtCGI’s stock price. However, many of these issueswere beyond the company’s control, and the sharesquickly recovered to hit an all-time high of $58 inFebruary 2015.
< p>The stock trades at an attractive 15.5 times the$3.10 a share CGI probably earned in fiscal 2015.Its 2016 earnings could rise to $3.44 a share, andthe stock trades at 14.0 times that forecast.
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