3 Reasons CGI Group Inc. Is the Only Tech Stock You Need to Own

CGI Group Inc. (TSX:GIB.A)(NYSE:GIB) offers predictable, growing earnings in an otherwise volatile sector.

| More on:
The Motley Fool

While the headlines have been fixated on BlackBerry Ltd.’s (TSX:BB)(NASDAQ:BBRY) recent turnaround efforts, fellow Canadian tech company CGI Group Inc. (TSX:GIB.A)(NYSE:GIB) has been growing its EPS at an impressive 24% CAGR over the past five years, including 23% in 2014.

CGI Group is an IT services provider that focuses on IT systems integration, consulting, and outsourcing. With strong diversification geographically, as well as between industries and service types, nearly $1 billion in free cash flow, and a successful history of acquiring and integrating companies, CGI offers stable growth within the rapidly shifting IT industry.

Here are three reasons why CGI Group is the best way to play the huge coming growth in IT spending.

1. CGI Group has an economic moat

Warren Buffett loves economic moats. An economic moat refers to a durable competitive advantage, that is to say, any competitive advantage that allows a company to control pricing, or sell more products than its competition consistently. A company with an economic moat is able to protect its earnings from its competition, and grow over time.

Within the tech sector, economic moats are rare since any advantage created by a new technology can often be quickly replicated by competition. Knowing this, it is often difficult to forecast a tech company’s earnings into the future, which is one reason Warren Buffett is known to avoid tech stocks.

CGI is an exception within this group as it has many moat-like qualities. CGI has a strong presence in five industry segments, most notably government services, and is well diversified globally.

This strong diversity and penetration into multiple industries deeply embeds CGI as a key player in a growing IT services sector. Although CGI’s diversity does provide some competitive edge, is the type and quality of CGI’s business relationships that provides a true economic moat.

Many of CGI’s clients have been so for 25+ years, and CGI often has contracts with these clients averaging seven years. In addition, CGI has an admirable 95% on-time and on-budget record, compared to a 50% industry average. This excellent service prevents business from leaving CGI, and with vendors rapidly consolidating their IT providers, CGI is positioned to benefit further from strong client relationships, as well as from recommendations.

In addition, CGI obtains approximately 33% of its revenue from the government sector. Due to the specialized nature of this work, especially as it pertains to security and privacy, CGI benefits from a 98% renewal rate from this group, which further solidifies its competitive edge and protects its earnings.

CGI’s economic moat is evident in its financial statements, and the company currently has industry leading margins, and is forecast to generate $1.1 billion in free cash flow by 2016. This cash will likely be used generate returns through acquisitions, buy-backs, and potentially a dividend.

2. Attractive valuation

CGI’s strong client relationships and diversity provide it with an edge over its peers, and this advantage comes at an attractive valuation. Currently, CGI is trading at a P/E ratio of 16.3, compared to an industry average of 18.2.

In 2014, CGI posted an EPS of $2.78, and CEO Micheal Roach estimates 2015 will bring a $3.19 EPS. This would result in a forward P/E ratio of 13.97, significantly below CGI’s peer group, and very low for a company with an estimated 11.3% long-term growth rate.

3. A good growth runway

CGI’s 11% long-term growth rate will come from a range of organic and inorganic growth opportunities. In 2012, CGI acquired Logica, and after a two-year integration program, CGI has now realized $400 million in annual synergies, and EPS accretion of 85% since the acquisition closed in 2012, and 88.5% over 2014.

With strong free cash flow and $536 million in cash, CGI is widely expected to make a similar acquisition in 2015, likely in the U.S. commercial space. CGI has proven to be excellent at identifying, purchasing, and integrating acquisitions, and another large acquisition similar to Logica should provide further earnings accretion.

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 Adam Mancini has a position in CGI Group Inc.

More on Tech Stocks

question marks written reminders tickets
Tech Stocks

Nvidia’s Historic Stock Split: Will Investors See Bigger Gains?

Nvidia's (NASDAQ:NVDA) record 10:1 stock split entices many investors in several important ways. But some myths aren't technically correct.

Read more »

A worker drinks out of a mug in an office.
Tech Stocks

Want $1 Million in Retirement? 3 Stocks to Buy Now and Hold for Decades

Growth stocks such as Docebo and Celsius Holdings should help you generate outsized gains in the upcoming decade.

Read more »

Male IT Specialist Holds Laptop and Discusses Work with Female Server Technician. They're Standing in Data Center, Rack Server Cabinet with Cloud Server Icon and Visualization
Tech Stocks

Missed Out on NVIDIA? My Best Growth Stock Pick to Buy and Hold

A TSX growth stock is a top pick and profitable investment choice if you missed out on the ascent of…

Read more »

grow dividends
Tech Stocks

3 Tech Stocks That Could Make You a Millionaire

Given their long-term growth potential, these three tech stocks could deliver oversized returns in the long run.

Read more »

Businessman holding AI cloud
Tech Stocks

Ready to Invest in Artificial Intelligence (AI)? 2 Stocks That Are Solid Bets

These two AI stocks provide investors with strong future opportunities as AI continues to become a part of our everyday…

Read more »

Dice engraved with the words buy and sell
Tech Stocks

Is Lightspeed Stock a Buy, Sell, or Hold?

Down 88% from all-time highs, is Lightspeed stock a good buy in May 2024 and can the TSX tech stock…

Read more »

Overhead shot of young adults using technology at a table
Tech Stocks

Forget NVIDIA: 1 Tech Stock to Buy Instead

Here’s why Shopify (TSX:SHOP) stock could be a smart long-term buy for investors willing to look beyond NVIDIA’s impressive growth.

Read more »

Lights glow in a cityscape at night.
Tech Stocks

2 Artificial Intelligence Stocks to Buy and Hold for the Next Decade

Qualcomm (NASDAQ:QCOM) and another well-placed AI stock could drive substantial capital gains over the next decade. Here's how.

Read more »