This Attractive Growth Play Has Ambitious Expansion Plans

CGI Group Inc. (TSX:GIB.A)(NYSE:GIB) topped analysts’ expectations when it reported first-quarter results on Wednesday. The beat sparked a small rally with shares touching an all-time high before closing up approximately 2% on the day.

CGI is Canada’s largest information technology services communications firm with a market cap just shy of $18 billion. This global player has a “build and buy” growth strategy that has handsomely rewarded investors over the years. Investors who’d jumped on board five years ago have more than doubled their investment, and the company is well positioned to repeat a similar performance.

CGI management anticipates doubling in size over the next five to seven years. In order to achieve this goal, the company will need to grow by 10-14% annually, which is well within its historical averages. This growth will be achieved through organic growth by expanding on current relationships and further acquisitions.  After digesting the largest acquisition in the company’s history, the $2.7 billion purchase of Logistica in 2012, it is once again well positioned to make a transformative acquisition. The company’s net debt has dropped from a high of 46.5% post Logistica acquisition to pre-acquisition levels of approximately 20%.

The company also has $1.6 billion in available cash and unused credit facilities primed and ready to be put towards another transformative acquisition. Despite strong operational cash flows ($1.4 billion in 2017), don’t expect the company to start paying a dividend, as it prefers to spend its cash on acquisitions and share buybacks.  With a track record such as CGI’s, it’s the right strategy and the best one to maximize shareholder returns.

Aside from future growth, what makes CGI an attractive investment today?

For starters, the company is currently trading at attractive valuations with price-to-book (P/B) and price-to-sales (P/S) ratios below industry averages. Furthermore, the company is a model of consistency, never trading significantly above or below its historical P/E average of 19.7. Based on expected earnings of $4.04 in 2018 and $4.34 in 2019, a 19.5 times valuation implies a share price of $78.77 in 2018 and $84.63 in 2019.

One important metric by which to measure CGI’s performance is its book-to-bill ratio. This ratio tells shareholders if the company is replacing older contracts with newer ones over time. Investors should look for a ratio above 100%. In its Q1 earnings released Wednesday, the company booked $3 billion for a quarterly book-to-bill ratio of 105.7% of revenue. The company’s total backlog currently sits at a hefty $21.1 billion.

CGI is a buy and can be viewed as a cornerstone of any diversified growth portfolio over the long term.

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Fool contributor Mat Litalien has no position in the companies mentioned.


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