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.

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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 2020 and beyond, Canada’s leader in computer outsourcing is set to continue solidifying its reputation internationally and doing 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. It’s also our #1 Aggressive buy for 2020.

The stock fell 10% in late January after the company reported lower-than-expected quarterly results. Slowing growth in the booking of new contracts also weighed on the stock. However, that’s partly because CGI is closing its Brazilian operations and restructuring its businesses in Portugal and Sweden.

The company’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. However, that missed the consensus forecast of $3.16 billion.

CGI gets 90% of its revenue from outside of Canada, so if you factor out currency exchange rates, overall revenue in the quarter rose 4.8%.

Earnings before unusual items improved 6.4%, to $334.9 million from $314.7 million. CGI prefers to reward investors with share buybacks instead of paying dividends. Due to fewer shares outstanding, earnings per share gained 9.8%, to $1.23 from $1.12. That, too, missed the consensus estimate of $1.24 a share.

The company signed $2.75 billion in contracts during the quarter. That’s down 9.3% from $3.03 billion a year earlier. 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, the contract backlog was $22.3 billion. That’s equal to 1.8 times its total annual revenue and bodes well for CGI’s future earnings and your future gains.

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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