Is CGI Group Inc Really a “Screaming Buy”?

CGI Group Inc (TSX:GIB.A)(NYSE:GIB) is one of Canada’s most polarizing companies. Should you add it to your portfolio?

| More on:
The Motley Fool

While BlackBerry has drawn most of the headlines, another firm has emerged as the largest technology company in Canada: CGI Group Inc (TSX:GIB.A)(NYSE:GIB). And while most Canadians are unfamiliar with the name, it is actually one of the most polarizing companies in the entire country.

So what does the company actually do?

CGI provides IT consulting and outsourcing services to big customers (including governments) around the world – last year, revenue totaled $10.1 billion.

The company gained notoriety late last year, thanks to the healthcare.gov fiasco. CGI was the lead contractor, and by all accounts did a very poor job. Michelle Snyder, the COO for the Centers for Medicare and Medicaid Services, even told her colleagues, “If we could fire them, we would.”

But the healthcare.gov project was only a small part of CGI’s business (roughly 3%), so the company has been able to move on smoothly. Thus when evaluating CGI as an investment opportunity, one has to look beyond that project.

”A screaming buy”

In an interview with The Globe and Mail, Jason Donville of Donville Kent Asset Management called CGI “a screaming buy”. And Donville Kent has one of the best track records on Bay Street, so this quote is certainly worth paying attention to.

There is without doubt a case to be made for CGI. It was started back in the mid-1970s, and has rewarded shareholders spectacularly ever since. As of last year, the stock had returned 25% to shareholders per year over the previous 25 years. Much of this track record is due to strong growth from acquisitions – since its founding, CGI has acquired more than 70 businesses.

Fast forward to today, and CGI is well-positioned to benefit from a recovery in Europe. Further growth would come from buying more companies, a recipe that has worked well thus far.

Best of all, according to Mr. Donville, CGI is trading at about 10 times estimated 2015 cash flow. So what’s not to like?

Dubious accounting

Despite these positives, many smart people are betting against CGI. This includes Jim Chanos, who became famous for betting against Enron.

The main concern with CGI is how it accounts for acquisitions. According to those who are betting against the company, CGI writes down the value of companies right before they are acquired. Then, after the acquisition is made, the targets are written back up again. These write-ups can then be counted towards revenue and earnings. This is commonly known as “cookie jar accounting”.

These concerns are especially prevalent with CGI’s 2012 purchase of UK-based Logica. In fact Veritas Investment Research’s Michael Yerashotis, who is one of CGI’s biggest critics, estimates that the company has made over $1.1 billion in accounting adjustments since the acquisition.

So what’s the verdict?

Over the course of CGI’s history, those who have bet against the company have paid a very expensive price for doing so. So there is a strong argument to trust management and buy the shares.

Then again, the company is not conservative with its accounting, and has every incentive to boost its share price (to make acquisitions easier). So there is always a danger that the picture isn’t as bright as management would like you to believe. Unless you’re looking for some adventure, it’s probably best to leave CGI to the pros.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair has no position in any stocks mentioned.

More on Investing

money cash dividends
Dividend Stocks

The 2 Stocks Every Dividend Investor Should Own for Reliable Cash

Dividend stocks offering consistent and reliable returns can be a crucial asset in any portfolio, especially for income-producing dividend portfolios.

Read more »

grow dividends
Dividend Stocks

2 Dividend Stocks to Double Up on Right Now

These top TSX dividend-growth stocks now offer yields above 7%.

Read more »

Dollar symbol and Canadian flag on keyboard
Dividend Stocks

TFSA: 2 Canadian Stocks to Buy and Hold for Tax-Free Gains

Building a large, tax-free nest egg in your TFSA with growth stocks can give you more control over your tax…

Read more »

Group of people network together with connected devices
Tech Stocks

This Is the Best Overlooked AI Stock on the TSX Today

This AI stock has been a top growing in the last while, but remains overlooked despite its strong portfolio and…

Read more »

Women's fashion boutique Aritzia is a top stock to buy in September 2022.
Dividend Stocks

May Boycotts: Is Loblaw Stock in Trouble?

Even extreme fluctuations in consumer purchasing patterns may not impact a stock as aggressively as demoralizing actions like boycotts.

Read more »

Dice engraved with the words buy and sell
Stocks for Beginners

TD Stock: Buy, Sell, or Hold?

TD stock (TSX:TD) is under immense scrutiny during its money laundering probe, but this could also mean it is a…

Read more »

Different industries to invest in
Tech Stocks

Why This AI Stock Surged 363% in Just 1 Year

This AI stock has surged this year by almost 400%! And yet this could only be the beginning for this…

Read more »

Online shopping
Tech Stocks

2 Growth Stocks Bay Street Might Be Sleeping On, but I’m Not

I'm not sleeping on Taiwan Semiconductor (NYSE:TSM) stock. Shopify (TSX:SHOP) is a Canadian stock with similar growth rates.

Read more »