CGI GROUP INC. (Toronto symbol GIB.A; www.cgi.com) is Canada’s largest provider of computer outsourcing services. CGI helps its clients automate routine functions, like accounting and buying supplies. That makes them more efficient and lets them focus on their main businesses.
CGI was our #1 stock pick for 2010 and 2011. In the past few years, the company has used acquisitions to expand outside of Canada. For example, it recently paid $2.7 billion for Logica plc, a U.K.-based firm that provides computer outsourcing services in 36 countries.
Thanks to purchases like this, CGI is more geographically diversified: it now gets 47% of its revenue from the U.S., 36% from Canada and 17% from the rest of the world.
CGI’s revenue rose 3.2%, from $3.7 billion in 2008 to $3.8 billion in 2009 (fiscal years end September 30). Unfavourable foreign exchange rates cut its revenue by 2.4%, to $3.7 billion, in 2010. However, revenue rose 13.2% to $4.2 billion, in 2011 after the company purchased Stanley Inc. which provides outsourcing services to military and civilian agencies of the U.S. government. Revenue rose a further 13.0% in 2012, to $4.8 billion.
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Tech stocks: CGI looks to higher earnings to offset integration costs
Earnings rose 46.5%, from $299.1 million in 2008 to $438.1 million in 2011. CGI prefers to use its excess cash to buy back shares instead of paying a dividend. Due to fewer shares outstanding, earnings per share jumped 72.8%, from $0.92 in 2008 to $1.59 in 2011.
Costs to integrate Logica pushed down earnings to $131.5 million, or $0.48 a share, in 2012. If you disregard all unusual items, earnings per share would have risen 4.2%, from $1.44 in 2011 to $1.50 in 2012.
CGI borrowed most of the cash it needed to buy Logica. That raised its long-term debt to $3.2 billion on September 30, 2012, from just $109.7 million a year earlier.
In the latest edition of The Successful Investor, we examine the effects of slow growth in Europe on the CGI’s U.K.-based acquisition, Logica. We also look at the added risk of the company’s acquisition strategy and whether its high debt is manageable. We conclude with our clear buy-sell-hold advice on the stock.
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