Canada’s largest provider of computer outsourcing services is in a strong position to survive the crisis because its services help businesses and government agencies alike keep operating remotely.
Meanwhile, the company aims to double its annual revenue growth in the next five to seven years.
CGI INC. (Toronto symbol GIB.A; www.cgi.com) helps its clients automate routine functions such as accounting and buying supplies. That improves their efficiency and lets them focus on their main businesses.
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Investors benefit from what CGI calls its “Build and Buy” strategy. The “build” part refers to the expansion of its relationships with current clients as well as the development of new ones. The “buy” part involves making acquisitions. The company tempers the risk of buying other companies by targeting firms that complement its expertise or help it to expand geographically.
CGI’s biggest purchase to date was the August 2012 acquisition of U.K.-based outsourcing firm Logica for $2.7 billion. Thanks to that purchase, clients in Europe now account for 42% of its revenue, followed by the U.S. (28%), Canada (14%), the U.K. and Australia (11%), and Asia (5%).
Overall revenue rose 17.7%, from $10.29 billion in 2015 to $12.11 billion in 2019 (fiscal years end September 30).
Investors saw earnings during those five years jump 29.9%, from $1.01 billion to $1.31 billion. Per-share profits rose at a faster rate of 50.2%, from $3.13 to $4.70, on more shares outstanding.
The company continues to buy smaller competitors to add value for its investors. It paid $130.3 million for SCISYS.
Based in Ireland, that firm provides computer outsourcing and advisory services to government and business clients in the media, space and defense, and environmental industries. It operates mainly in Ireland, the U.K. and Germany. The new operations will add $100 million to CGI’s annual revenue.
It also acquired Meti, a French firm selling specialized software to help retailers in 20 European countries manage stores and warehouses. CGI paid $43.4 million for Meti.
CGI’s revenue in its fiscal 2020 first quarter, ended December 31, 2019, improved 3.1%, to $3.05 billion from $2.96 billion a year earlier. If you factor out currency exchange rates, overall revenue in the quarter rose 4.8%. Without the contribution of its new businesses, revenue rose 1.2%.
Earnings improved 6.4%, to $334.9 million from $314.7 million. Due to fewer shares outstanding, earnings per share gained 9.8%, to $1.23 from $1.12.
The company signed $2.75 billion in contracts during the quarter (76% renewals and extensions, 24% new business). That’s down 9.3% from $3.03 billion a year earlier.
Growth Stocks: Strong balance sheet and contract backlog point to a strong future
In the latest quarter, its book-to-bill ratio fell to 90.0% (a figure below 100% implies demand for its services is falling). However, over the past 12 months, its book-to-bill ratio was a still-healthy 101.3%.
As of December 31, 2019, CGI’s contract backlog was $22.3 billion. That’s equal to 1.8 times its total annual revenue and bodes well for its future earnings and your future gains.
The company is also a leading supplier of technology services to the U.S. federal government; in the latest quarter, those contracts accounted for 12.9% of CGI’s total revenue.
It’s likely the company will win more U.S. government contracts over the next few months due to the passage of a $2 trillion U.S. COVID-19 relief bill. The plan will put strains on various agencies as they struggle to send out cash payments and loans to both individuals and businesses.
The crisis should also increase demand from businesses for CGI’s cybersecurity services as more of their employees work from home. The ongoing shift to cloud-computing platforms, which let users access computer programs online and store files on remote servers, remains another long-term growth driver for CGI.
The company’s strong balance sheet will help support its growth, even during the COVID-19 crisis. As of December 31, 2019, its long-term debt was $2.01 billion, or just 9% of the company’s market cap. CGI also held cash of $213.1 million.
The company prefers to reward investors with share buybacks instead of paying them a dividend.
In February 2020, it repurchased 6.01 million of its class A subordinate voting shares from the Caisse de dépôt et placement du Québec, which manages the province’s public pension plan. The company paid $600 million for those shares; the Caisse still holds 11.9% of its outstanding shares. However, to protect value for investors, CGI will probably suspend further buybacks until the COVID-19 pandemic eases.
As the company gets over 50% of its revenue from recurring contracts, we’re reasonably confident in the consensus earnings estimate of $5.02 a share for all of fiscal 2020. The stock trades at 17.2 times that forecast. That’s an attractive multiple for your new buying.
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