CGI Group Inc.’s Q2 EPS Rises 10.3%: Should You Buy?

CGI Group Inc. (TSX:GIB.A)(NYSE:GIB) reported very strong Q2 results on April 27, but its stock has reacted by moving lower. Should you use this weakness to buy?

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CGI Group Inc. (TSX:GIB.A)(NYSE:GIB), the world’s fifth-largest independent information technology and business-process services company, announced very strong second-quarter earnings results on the morning of April 27, but its stock has responded by falling about 1%. Let’s take a closer look at the results and the fundamentals of its stock to determine if we should use this weakness as a long-term buying opportunity or if we should look elsewhere for an investment instead.

A strong quarter of top- and bottom-line growth

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

Metric Q2 2016 Actual Q2 2016 Expected Q2 2015 Actual
Adjusted Earnings Per Share $0.86 $0.88 $0.78
Revenue $2.75 billion $2.74 billion $2.60 billion

 Source: Financial Times

CGI’s adjusted earnings per share increased 10.3% and its revenue increased 5.7% compared with the second quarter of fiscal 2015. Its double-digit percentage earnings-per-share growth can be attributed to its adjusted net earnings increasing 6.8% to $268.3 million and its weighted-average number of diluted shares outstanding decreasing 2.9% to 313.6 million.

Its strong revenue growth can be attributed to its revenues increasing in six of its seven major segments, led by 7% growth to $747.57 million in its U.S. segment, 14.6% growth to $378.95 million in its France segment, 8% growth to $360.6 million in its U.K. segment, and 13.9% growth to $135.48 million in its Asia Pacific segment. It is also important to note that the company benefited from a $173.7 million gain on foreign currency translation.

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

  1. Adjusted earnings before interest and taxes (EBIT) increased 7.6% to $390.6 million
  2. Adjusted EBIT margin improved 20 basis points to 14.2%
  3. Earnings before income taxes increased 8.7% to $368 million
  4. Backlog increased 3.5% to $20.7 billion
  5. Bookings increased 21.3% to $2.73 billion
  6. Net debt increased 3% to $1.93 billion
  7. Cash provided by operating activities decreased 11.7% to $251.4 million
  8. Repurchased 9.1 million of its Class A subordinate voting shares for a total cost of approximately $508.7 million

Is CGI Group a buy or sell today? 

Overall, it was a fantastic quarter for CGI, so I think its stock should have responded by making a significant move higher. With this being said, I think its stock represents a great long-term investment opportunity today for two reasons in particular.

First, it’s a value play. CGI’s stock now trades at just 17 times fiscal 2016’s estimated earnings per share of $3.51 and only 15.8 times fiscal 2017’s estimated earnings per share of $3.77, both of which are inexpensive compared with its five-year average price-to-earnings multiple of 35.9 and the industry average multiple of 26. These multiples are also inexpensive given the company’s estimated 8.7% long-term earnings growth rate.

Second, it has been actively repurchasing its shares. CGI repurchased 6.93 million shares for a total cost of about $332.5 million in fiscal 2015, and it has repurchased 9.32 million shares for a total cost of about $517.8 million in the first half of fiscal 2016.

There are also about 12.11 million shares remaining for repurchase under the 21.43 million share-repurchase program that began on February 11, 2016, and will end on February 3, 2017, so I think the company will accelerate repurchases in the second half of the year, which will boost its earnings-per-share growth going forward and make its remaining shares more valuable than ever.

With all of the information provided above in mind, I think all Foolish investors should strongly consider using the post-earnings weakness in CGI Group to begin scaling in to long-term positions.

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 is a recommendation of Stock Advisor Canada.

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