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 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 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

Bank sign on traditional europe building facade
Bank Stocks

Are Canadian Bank Stocks Still Undervalued?

Bank stock are moving higher. Is it time to buy or wait?

Read more »

You Should Know This
Stocks for Beginners

5 Things to Know About Cargojet Stock in November 2022

Cargojet (TSX:CJT) stock should continue to see massive growth in the near and long term, thanks to long-term agreements and…

Read more »

Double exposure of a businessman and stairs - Business Success Concept
Dividend Stocks

Better Buy: BCE Stock or Enbridge?

BCE and Enbridge pay growing dividends with high yields. Is one more attractive today?

Read more »


TFSA: 3 TSX Stocks to Buy With the New $6,500 Room Limit

Canadians who are eager to utilize the new $6,500 room limit in 2023 should look to TSX stocks like Aritzia…

Read more »

Financial technology concept.

The Smartest Stocks to Buy With $20 Right Now and Hold Forever

Given the favourable market conditions and their growth initiatives, these three under-$20 stocks offer excellent buying opportunities for long-term investors.

Read more »

Silver coins fall into a piggy bank.
Dividend Stocks

2 Unstoppable Dividend Stocks to Load Up in Your TFSA

These two dividend stocks provide long-term passive income that comes out every month, thanks to lease agreements lasting over a…

Read more »

Doctor talking to a patient in the corridor of a hospital.
Tech Stocks

3 Healthcare Stocks to Buy for Long-Term Passive Income

Healthcare stocks provide exposure to an essential service sector. They are also the best for passive income in the short…

Read more »

potted green plant grows up in arrow shape

4 TSX Growth Stocks to Buy and Hold Forever

Here's why TSX growth stocks, and these four stocks specifically, are some of the best investments you can buy in…

Read more »