Topic: Growth Stocks

Growth stocks: Canadian tech stock CGI Group delivers on ambitious “Build and Buy” strategy

CGI Group

Today we look at CGI Group, a tech stock that outsources IT functions for a wide range of clients, including government agencies. The company has followed a successful acquisition strategy that has raised revenues and pushed its share price. It has continued its growth with acquisitions in the booming areas of outsourcing, cloud computing and computer security. As the lead contractor for the website that was set up as part of the Obamacare rollout in the U.S., the company’s stock slipped in the wake of problems with the 2013 website launch. However, it did not take long to recover, hitting a new high earlier this year.

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In 2012, CGI Group acquired U.K.-based outsourcing firm Logica. This was the biggest purchase in its 39-year history and is the main reason why the stock is up nearly 169% since then.

For 2018 and beyond, this stock is likely to use its strong balance sheet to make further acquisitions. Canada’s leader in computer outsourcing, it continues to solidify its reputation internationally and does a good job of replacing older contracts with new deals.

CGI GROUP INC. (Toronto symbol GIB.A; is Canada’s largest provider of computer-outsourcing services. It helps its clients automate routine functions such as accounting and buying supplies. That lets those companies focus on their main businesses and improve their efficiency.

The U.K. accounts for about 10% of CGI’s revenue, while the rest of Europe supplies 52%.

The company feels the uncertainty over the U.K.’s plan to leave the European Union could spur greater demand for its services. That’s because business and government agencies, in both the U.K. and Europe, will need to improve their efficiency. CGI could also help those U.K. clients that intend to relocate to Europe reprogram their systems.

The stock has jumped nearly 20% in the past year. Despite that gain, it trades at a reasonable 19.4 times the $4.64 a share that it will probably earn in its 2019 fiscal year, which ends September 30, 2019.

In its fiscal 2017 fourth quarter, ended September 30, 2017, CGI Group’s earnings improved 0.5%, to $275.7 million from $274.4 million a year earlier. Per-share profits jumped 4.5%, to $0.93 from $0.89, on fewer shares outstanding. However, that missed the consensus estimate of $0.94.

Revenue gained 1.0%, to $2.61 billion from $2.58 billion. That CGI Group gets 90% of its revenue from outside of Canada. If you factor out currency exchange rates, revenue in the quarter rose 2.5%. That gain is mainly due to new contracts and renewals in the U.S., Canada, France and Asia.

Growth stocks: Strong reputation helps CGI Group attract new clients

CGI signed $2.91 billion in contracts during the quarter, up 1.9% from $2.86 billion a year earlier. Even so, the company continues to do a good job replacing older contracts with new deals: in the past 12 months, new bookings equalled 104.1% of its completed contracts.

As of September 30, 2017, CGI Group’s backlog was $20.8 billion. They’re worth 1.9 times its annual revenue.

Recently, the company repurchased and cancelled 3.2 million class A subordinate voting shares held by Serge Godin, its founder and executive chairman. That purchase is part of CGI’s plan to buy back up to 20.6 million class A shares, or 8% of the total outstanding, by February 6, 2019. #1 Aggressive Buy for 2018.

Recommendation in The Successful Investor: BUY

How much importance do you place on a service company’s ability to attract new contracts even if it has a loyal customer base?

To see how we identify growth stocks and how to minimize your risk with aggressive growth stocks, read What are growth stocks?

This post was originally published in 2016 and is updated regularly.


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