CGI Group Inc. $12 – Toronto symbol GIB.A

CGI GROUP INC. $12 (Toronto symbol GIB.A; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 323.6 million; Market cap: $3.9 billion; SI Rating: Speculative) is one of the largest independent information technology and business process services firms in North America.

CGI provides day-to-day maintenance and improvement for clients’ business applications, and integrates and customizes technologies and software applications. The company also manages back-office business processes and transactions. North America accounts for over 90% of its revenue.

CGI is a former subsidiary of BCE Inc., and BCE is its largest client at roughly 14% of total revenue.

In its first fiscal quarter ended December 31, 2007, earnings rose 22.2% to $0.22 a share (total $72.6 million) from $0.18 a share ($58.4 million) a year earlier. That’s due to the company’s strategy of focusing on higher profit margin contracts. Cash flow per share rose 13.3%, to $0.34 from $0.30. Revenue rose just 1.2%, to $914.7 million from $904.1 million. If you exclude the negative impact of the higher Canadian dollar, revenue would have grown 6.1%.

CGI booked $1.15 billion of new contracts, extensions and renewals in the latest quarter. That included a $91.8 million, three-year deal to provide engineering and technical management services to Canada’s Public Works department. It also includes a $10 million U.S. contract with the U.S. Internal Revenue Service.

CGI provides technology services instead of designing new hardware, so its research costs are much lower than those of Nortel and Gennum. CGI’s research spending rose 4.5% in the latest quarter, to $7.0 million (0.8% of revenue) from $6.7 million (0.7% of revenue).

A slowing economy could hurt CGI’s growth. However, recurring revenue from long-term outsourcing contracts, especially with government agencies, cuts its risk. CGI’s order backlog at December 31, 2007 was $12 billion, which is equal to just over three year’s revenue.

CGI should earn $0.92 a share in fiscal 2008, and the stock trades at just 13.0 times that figure.

GCI Group is a buy.

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