We picked CGI as your #1 Aggressive Buy for 2023. This is the seventh year in a row we’ve selected the firm as a top buy, and our readers have profited from the stock’s 114% rise over that time. Compare that to the 32% gain for the S&P/TSX Composite Index.
The company tends to fuel its growth with acquisitions. However, its strong history of successfully absorbing new businesses helps cut that risk.
We feel the shares can go much higher over the next few years as businesses shift more of their computing needs to cloud platforms. The company is also helping its clients integrate artificial intelligence software with their systems to improve efficiency.
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CGI INC. (Toronto symbol GIB.A; www.cgi.com) is Canada’s largest provider of computer-outsourcing services. CGI helps clients automate routine functions such as accounting and buying supplies. That makes companies more efficient and lets them focus on their main businesses.
Clients in Europe accounted for 44% of CGI’s revenue in the latest quarter. That’s followed by the U.S. (31%), Canada (15%), and other countries (10%). The U.S. federal government is CGI’s single-largest client, accounting for 13.5% of its overall revenue.
CGI has made almost 90 acquisitions since going public in 1986. Its biggest purchase to date was the 2012 acquisition of U.K.-based outsourcing firm Logica for $2.7 billion.
Growth Stocks: New contracts continue to boost revenue and share buybacks for CGI
The company’s revenue in its fiscal 2023 third quarter, ended June 30, 2023, rose 11.2%, to $3.62 billion from $3.26 billion a year earlier. However, that missed the consensus forecast of $3.64 billion. If you factor out currency rates, revenue rose 6.3% in the latest quarter compared to a 11.4% gain in the fiscal 2023 second quarter.
Excluding unusual items, overall earnings in the quarter rose 14.7%, to $425.7 million from $371.2 million. CGI prefers to reward investors with share buybacks instead of paying dividends. Due to fewer shares outstanding, earnings per share improved 16.9%, to $1.80 from $1.54. That topped the consensus estimate of $1.79 a share.
CGI signed $4.39 billion in new contracts during the quarter. Its book-to-bill ratio in the past 12 months is also a very healthy 113.3% (a figure below 100% implies demand for its services is falling).
As well, the company’s contract backlog at the end of the quarter was $25.63 billion, or 1.83 times its annual revenue. That cuts your risk.
CGI continues to look for acquisitions. In fact, it aims to double the company’s size over the next five to seven years. Its strong balance sheet will support that plan. As of June 30, 2023, it held cash of $1.47 billion, while its long-term debt of $2.37 billion is a low 7% of its market cap.
The stock hit a new all-time high of $142.31 on May 30, 2023. The shares have dipped only slightly since then, and they trade at an attractive 19.7 times the $7.06 a share that CGI will probably earn in fiscal 2023. Earnings could improve a further 10% to $7.77 a share in 2024, and the stock trades at an even more attractive 17.9 times that forecast.
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