Topic: Growth Stocks

Growth stocks: Canadian tech stock CGI Group delivers on ambitious “Build and Buy” strategy

cgi-group

Today we look at CGI Group, a tech stock that outsources IT functions for a wide range of clients, including government agencies. The company has followed a successful acquisition strategy that has raised revenues and pushed its share price . It has continued its growth with acquisitions in the booming areas of outsourcing, cloud computing and computer security. As the lead contractor for the healthcare.gov website that was set up as part of the Obamacare rollout in the U.S., the company’s stock slipped in the wake of problems with the 2013 website launch. However, it did not take long to recover, hitting a new high earlier this year.

In 2012, CGI acquired U.K.-based outsourcing firm Logica. This was the biggest purchase in its 39-year history and is the main reason why the stock is up nearly 169% since then.


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For 2017 and beyond, this stock is likely to use its strong balance sheet to make further acquisitions. Canada’s leader in computer outsourcing, it continues to solidify its reputation internationally and does a good job of replacing older contracts with new deals.

CGI GROUP INC. (Toronto symbol GIB.A; www.cgi.com) is Canada’s largest provider of computer-outsourcing services. It helps its clients automate routine functions such as accounting and buying supplies. That lets those companies focus on their main businesses and improve their efficiency.

In its fiscal 2017 second quarter, ended March 31, 2017, CGI earned $275.2 million. That’s up 2.6% from $268.3 million a year earlier. Per-share profits jumped 5.8%, to $0.91 from $0.86, on fewer shares outstanding.

The company’s revenue fell 0.9% in the quarter, to $2.72 billion from $2.75 billion. However, CGI gets 90% of its revenue from outside of Canada. If you factor out currency exchange rates, revenue rose 5.6%. That gain is mainly due to new and renewed contracts in the U.S., Canada, the U.K., France and Asia.

CGI ended the quarter with cash of $282.0 million, and its long-term debt of $1.7 billion is just 9% of its market cap. That puts the company in a strong position to make more acquisitions. Its last major buy was the 2012 purchase of U.K. based Logica for $2.7 billion.

Growth stocks: Strong reputation helps CGI attract new clients

CGI signed $2.7 billion in contracts during the quarter, unchanged from a year earlier. The company continues to do a good job replacing older contracts with new deals: in the past 12 months, new bookings equalled 107.9% of its completed contracts.

In April, the company won a contract from Bisnode, a Swedish firm that provides data analytics services to businesses in Europe. Under the deal, CGI will improve the performance and security of Bisnode’s systems. This five-year agreement is worth $35 million; that’s small next to CGI’s annual revenue of $10.7 billion. However, the agreement enhances the company’s reputation and will help it win more contracts in Europe.

The stock has gained 11% in the past year, but still trades at a reasonable 18.0 times the $3.72 a share that CGI will probably earn in 2017.

Recommendation in The Successful Investor: BUY

To see how we identify growth stocks and how to minimize your risk with aggressive growth stocks, read What are growth stocks?

This post was originally published in 2016 and is updated regularly.

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