MENU

Should You Buy CGI Group Inc. Today?

CGI Group Inc. (TSX:GIB.A)(NYSE:GIB) stock hasn’t done much recently. In the past year, it has declined by nearly 2%. That said, long-term investors have done very well.

An investment made at the end of 2007 would have delivered an annualized rate of return of 19%, outperforming the U.S. market (using S&P 500 as a proxy), which has only delivered a rate of return of 6.5% in that period.

The business

CGI Group has been in business for more than 40 years. It is the fifth-largest independent information technology (IT) and business process services firm in the world. It serves clients across the Americas, Europe, and Asia Pacific, offering a portfolio of services including high-end business and IT consulting, systems integration, application development and maintenance, and infrastructure management.

software

In the last fiscal year, the company generated 44% of revenue from IT services, 10% from business process services, and 46% from systems integration and consulting.

CGI Group’s business is diversified geographically and serves across a variety of vertical markets.

Here is the company’s 2016 revenue geographic diversification: 28% from the United States; 15% from Canada; 15% from the United Kingdom; 13% from France; 8% from Sweden; 6% from Finland; and 15% from the rest of the world.

And here is the diversification by vertical markets: 34% from government; 23% from manufacturing, retail, and distribution; 21% from financial services; 15% from telecommunications and utilities; and 7% from health.

Shareholder value creation

A part of CGI Group’s growth strategy is making strategic acquisitions. Since fiscal 2007, it has largely generated strong returns on equity of at least 12% every year other than one year. This shows that management is prudent and knows where to allocate its capital to generate value.

Although the company doesn’t currently offer a dividend, given investors bought at reasonable valuations, any investment made in the last decade has delivered an annualized double-digit rate of return, which has been supported by long-term earnings and cash flow growth.

Investor takeaway

CGI Group is a strong and diversified business with a long history of operating successfully. Moreover, it has worked on a couple of acquisitions this month, which should help with its growth. However, I don’t think the stock has a big enough margin of safety to be worth my dollars right now.

CGI Group recently traded at $62.50 per share, a multiple of ~17.2, and it’s expected to grow its earnings per share by 7.3-13.7% per year for the next three to five years.

The street consensus from Thomson Reuters’s latest report indicates a mean 12-month target price of $69.20 per share, which represents upside potential of ~10.7% in the near term.

Interested investors looking for a bigger margin of safety should consider the shares at lower levels.

Announcing: Our #1 TSX pick for the AI revolution!

Bay Street and Wall Street experts agree: The AI revolution is set to be "bigger than the internet." That's why Iain Butler and the Stock Advisor Canada team have just released a brand-new report detailing their #1 TSX pick poised to profit from this next tech tidal wave.

Discover their #1 TSX pick now. This could be your chance to get in on the ground floor!

Click here to discover more!

Fool contributor Kay Ng has no position in any of the stocks mentioned. CGI Group is a recommendation of Stock Advisor Canada.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.