Although the brand may not be well known outside government circles, CGI Technologies and Solutions Inc. (TSX:GIB.A) (NYSE:GIB) is deeply embedded in government agencies in North America and Europe, providing key information technology support and generating $10 billion in annual revenues.
CGI expanded its presence in Europe with the acquisition of Britain’s Logica in 2012. It also has a backlog of signed contracts worth more than $20 billion.
CGI released its second-quarter earnings on April 29 and the results were mixed. Although earnings per share grew to $0.78 per share from $0.73 per share in the same period last year, revenue dropped slightly to $2.7 billion from $2.8 billion.
Still, CGI remains a top pick for Alex Lane, portfolio manager of the Dynamic Canadian Power Growth Fund.
“Europe is 58% of their business so any kind of uncertainty could lead to a reduction of the multiple, but recent data suggest business in Europe is accelerating; there’s a lot of companies that need to get more efficient, that need to outsource,” Lane said in a recent interview with BNN.
Margins are improving, he added, and CGI is now in the second stage of integration with Logica. “So, there’s new business coming on that’s high margin.”
Lane estimated that CGI will ultimately reach 10-times EBITDA, which translates to $60 a share. The stock was trading at just above $50 earlier this week. “That’s a pretty good upside and we think this is a must-own name for Canadian investors.”
Morningstar recently increased its fair value estimate to $55 per share, noting that CGI has a solid operational foundation, a build-and-buy growth strategy, and vendor independence, which differentiates it from similar companies and supports both new and repeat business.
“The IT services market remains highly competitive, and vendor consolidation is expected to characterize the industry as clients increasingly look to simplify their organizational structure,” Morningstar said in a report. “However, we think CGI’s acquisition of Logica in 2012 and the resulting growth in its global delivery model has better positioned the firm to meet these market pressures and compete on a global scale.”
Although CGI does not currently pay a dividend, it generates significant free cash flow, suggesting a dividend may be in the technology company’s future. It’s definitely a stock worth further research for Foolish investors.
