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CGI Group Inc. Firing on All Cylinders

Top-line growth continues to progress and improve

CGI Group Inc.’s (TSX:GIB.A)(NYSE:GIB) revenue this quarter was $2.7 billion — pretty much flat versus the same quarter last year as foreign currency put pressure on this result, but on a constant-currency basis, revenue increased 3.7%.

Importantly, Europe saw its revenue increase a strong 5.2% on a constant-currency basis, while growth in Canada and the U.S. were slower than expected.

Profitability continues to rise…

… as the company’s EBIT margin and ROE continue to rise. In the quarter, CGI achieved an EBIT margin of 14.8% versus a 14.3% EBIT margin in the same quarter last year, and an ROE of 17.7% versus 16.9% last year.

These margins compare very favourably with margins from the period right after the Logica acquisition, which hit a low of well below 10% at that time. The recovery in margins speaks to management’s strong ability to integrate acquisitions and bodes well for its track record and the company’s strength and business model.

Balance sheet remains strong

As at the end of December, CGI had approximately $1.8 billion in cash and unused credit facilities, and net debt was $1.5 billion, representing a net-debt-to-capitalization ratio of 18.2%.

On a cash flow basis, CGI generated $349.7 million in cash from operations, which represents 13.1% of revenue, so it’s very strong. The company continues to face questions about how it will deploy this cash, which is a good problem to have. The fact is, the company’s strong cash flow generation leaves it well positioned to continue to be a consolidator, and execute its “Build and Buy” growth strategy.

This growth strategy targets growing organically through contract renewals and extensions, winning new contracts, smaller niche acquisitions, and, if and when the time is right, bigger transformational acquisitions. We are seeing this strategy continue to play out in the company’s healthy backlog and in the continued success at being awarded contracts.

And should there be excess cash on hand without a compelling opportunity to invest in the business, the company will to continue to buy back shares and repay debt. This quarter, management renewed its share-buyback renewal program and can purchase and cancel up to 21.2 million shares.

Book-to-bill ratio strong

At the end of the quarter, the company’s backlog stood at $21 billion compared to $20 billion last year for an increase of 5%. Also very important is the fact that the book-to-bill ratio was 111% for the quarter and 108% for the trailing 12-month period. Let’s recall that the book-to-bill ratio is indicative demand and that anything over 100% is good, as this is a signal of healthy demand.

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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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