The Motley Fool

Is CGI Group Inc. the Top Tech Stock to Buy Today?

CGI Group Inc. (TSX: GIB.A)(NYSE:GIB), the world’s fifth-largest independent information technology and business process services company, announced second-quarter earnings results before the market opened on April 29 and its stock has responded by falling about 5% in the trading sessions since. Let’s take a closer look at the results to determine if a sell-off of this magnitude was warranted, or if we should consider using this weakness as a long-term buying opportunity.

Breaking down the second-quarter results

Here’s a summary of CGI’s second-quarter earnings results compared with its results in the same period a year ago.

Metric Q2 2015 Q2 2014
Earnings Per Share $0.78 $0.73
Revenue $2.60 billion $2.70 billion

Source: CGI Group Inc.

CGI’s diluted earnings per share increased 6.8% and its revenue decreased 3.8% compared with the second quarter of fiscal 2014. The company’s strong earnings per share growth can be attributed to its adjusted net income increasing 9.4% to a record $251.2 million, and this was helped by its total operating expenses decreasing 6.3% to $2.26 billion. Its slight decline in revenue can be partially attributed to it booking just $2.3 billion in contract awards during the quarter, a decrease of 20.7% from the $2.9 billion booked in the year-ago period.

Here’s a quick breakdown of eight other important statistics from the report compared with the year-ago period:

  1. Adjusted earnings before interest and taxes (EBIT) increased 6.3% to $363.1 million
  2. Adjusted EBIT margin improved 140 basis points to 14%
  3. Return on invested capital improved 120 basis points to 14.6%
  4. Return on equity improved 50 basis points to 18.4%
  5. Cash provided by operating activities decreased 18.8% to $284.7 million
  6. Reported a backlog of signed orders totaling $20.0 billion at the end of the quarter, an increase of 2.7% from the end of the year-ago period
  7. Net debt decreased 30.2% to $1.87 billion
  8. Weighted average number of diluted shares outstanding increased 2% to 322.92 million

Is today the day to buy shares of CGI Group?

I think the decline in CGI’s stock represents a very attractive long-term buying opportunity. I think this because it now trades at very low valuations, including just 16.2 times fiscal 2015’s estimated earnings per share of $3.18 and only 15 times fiscal 2016’s estimated earnings per share of $3.44, both of which are very inexpensive compared with its five-year average price-to-earnings multiple of 33.7 and the industry average multiple of 20.3.

I think CGI’s stock could consistently command a fair multiple of at least 20, which would place its shares upwards of $68 by the conclusion of fiscal 2015 and upwards of $63 by the conclusion of fiscal 2016, representing upside of more than 22% and 32%, respectively, from current levels.

With all of the information provided above in mind, I think CGI Group represents a great long-term investment opportunity today. Foolish investors should take a closer look and strongly consider using the post-earnings weakness to initiate positions.

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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 Joseph Solitro has no position in any stocks mentioned. CGI Group Inc. is a recommendation of Stock Advisor Canada.

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