3 Reasons Why CGI Group Inc. Is Still a Good Buy

With the recent release of CGI Group Inc.’s (TSX:GIB.A)(NYSE:GIB) second-quarter 2016 results, investors got further confirmation that all is progressing well at one of the world’s leading independent information technology and business-process-service firms.

Organic growth improving

In the second quarter, constant currency revenue declined 1%. While still a decline, it is much better than the 1.8% decline seen last quarter and the +3% decline in quarters before that.

Asia Pacific was a highlight this quarter, as this geographic region achieved a constant-currency revenue growth rate of 11.6%. While this region only represents just over 5% of revenue, it is clearly a growth area for CGI.

On to the more significant regions, such as the U.S. and the Nordics, at 29% and 17% of revenue, respectively, we see a different picture. The U.S. saw a constant currency revenue decline of 3%. But, while it is a decline, it is an improvement from last quarter, which saw a 7% decline. This decline is due to the continued delays within the defense sector, where CGI has $1.2 billion in submitted proposals awaiting approval.

To counter this, CGI has continued its push to secure more business in the U.S. on the commercial side, such as with financial institutions and utilities companies, and this is bearing fruit as U.S. revenue, excluding the defense business, increased 4%. And the commercial pipeline in the U.S. is up more than 50%, mostly due to the financials vertical.

On to the Nordics. While revenue declined 5.3%, the quarterly book-to-bill ratio was a very strong 121%, so the future looks good.

Margins continue to improve

The EBIT margin increased again this quarter and came in at 14.2% compared to 14% last year. I still like to compare these margins to the post-Logica-acquisition margins of below 10%, as it illustrates what the company has done and can do with future acquisitions. Margins have increased this quarter due to a better revenue mix, ongoing benefits from restructuring efforts, and the opening of the global delivery centres.

Strong outlook

CGI continues to generate solid cash flows, it has a healthy balance sheet, and it has many options. The company has over $2 billion in cash and liquidity and will continue to use this to grow the business both organically and through acquisitions and to buy back shares. CGI is committed to delivering double-digit EPS growth for the year.

In closing, backlog increased 2.7% year over year to $20 billion, and the company’s trailing 12-month book-to-bill ratio was a healthy 104.1%. Recall that a book-to-bill ratio of over 100% is healthy and signifies strong demand. This is an improvement compared with last quarter, when it stood at 101%.

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Fool contributor Karen Thomas owns shares of CGI GROUP INC CL A SV. CGI Group is a recommendation of Stock Advisor Canada.

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