CGI GROUP INC. $20 - Toronto symbol GIB.A

CGI GROUP INC. $20 (Toronto symbol GIB.A; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 258.9 million; Market cap: $5.2 billion; Price-to-sales ratio: 1.2; No dividends paid; TSINetwork Rating: Extra Risk; www.cgi.com) is Canada’s largest provider of computer outsourcing services. It also operates in 15 other countries. Canada and the U.S. each accounted for 47% of its revenue in the latest fiscal year; Europe and Asia supplied the remaining 6%.

The company often uses acquisitions to fuel its growth. It cuts the risk of this strategy by focusing on smaller companies that enhance its products or expand its geographic reach.

Big purchase starting to pay off

CGI’s most important purchase in the past few years was its $932.2-million acquisition of Stanley Inc. in September 2010. Stanley provides computer outsourcing services to military and civilian agencies of the U.S. government. These clients could face budget cuts in the coming years. But even if they do, Stanley should keep winning contracts, because its services help these agencies cut costs.

CGI’s revenue rose 3.1%, from $3.7 billion in 2007 to $3.8 billion in 2009 (the company’s fiscal years end September 30). Unfavourable currency rates cut revenue by 2.4%, to $3.7 billion, in 2010. Thanks to the Stanley acquisition, revenue rebounded to $4.3 billion in 2011.

Earnings rose at a much faster pace: up 84.7%, from $235.6 million in 2007 to $435.1 million in 2011. CGI prefers to use its excess cash to buy back shares instead of paying a dividend. Because of fewer shares outstanding, earnings per share rose 125.7%, from $0.70 in 2007 to $1.58 in 2011.

Falling debt, rising order backlog

CGI had to borrow some of the cash it needed to buy Stanley. That raised its long-term debt to $1 billion on September 30, 2010, from just $265.4 million a year earlier. However, CGI had cut its debt to $917.8 million by December 31, 2011. That’s just 18% of its market cap.

The company is also in a strong position to profit from growing demand for cloud computing. (That’s where data is kept on centralized servers that users connect to over the Internet.) For example, CGI recently won a $20.8 U.S.-million, five-year contract to modernize and manage several U.S. government websites, including www.USA.gov.

In all, CGI booked $1.4 billion of new contracts during the quarter ended December 31, 2011. New clients accounted for 52% of this total; the remaining 48% came from extensions and renewals. Its order backlog was $13.6 billion at the end of the quarter, up from $13.0 billion a year earlier. That’s equal to 3.2 times its annual revenue.

Low p/e adds extra appeal

The company will probably earn $1.75 a share in fiscal 2012. The shares trade at 11.4 times that estimate. That’s a low p/e ratio in light of CGI’s strong earnings growth and recurring revenue from long-term contracts.

CGI Group is a buy.

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