CGI Group (TSX:GIB.A): You Can Buy and Hold it Forever

Investors are so busy buying software stocks that the market has wrongly valued CGI Group (TSX:GIB.A)(NYSE:GIB) stock.

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The COVID-19 pandemic has created some attractive buy opportunities for investors who buy a quality stock for the long term. One such quality stock in the tech sector is CGI Group (TSX:GIB.A)(NYSE:GIB). This stock has a history of generating stable returns for the last 19 years.

The only time CGI stock collapsed was during the dot.com bubble of 2000, when it fell as much as 80%. The next big sell-off came in March, when the stock fell by 38%. This sell-off has created an opportunity to buy CGI at an attractive price.

CGI’s resilient business model can withstand COVID-19 crisis

CGI is one of the world’s largest information technology (IT) and business process service companies, generating $12 billion in annual revenue. The company offers end-to-end digitization solutions, from designing a digital roadmap to implementing and maintaining it and improving it further. Its digitization solutions help companies optimize their business process, save costs, and improve returns on investment.

The company earns money by entering into long-term service contracts with government agencies and commercial enterprises. It caters to the business automation needs of financial services, manufacturing, retail, distribution, utilities, healthcare, and communications industries. It grows through acquisitions and organically by retaining customers, cross-selling, and up-selling.

CGI’s long-term service contracts lends better visibility into future revenue, helping it plan its operating expenses. The company aims to maintain a 100% book-to-bill ratio, which shows the value of its booking against revenue and supports the management’s efforts to grow revenue.

Its diversified customer base across a variety of industries and geographies and visibility on future revenue make it resilient to an economic downturn.

YoY Growth 2015 2016 2017 2018 2019
Revenue -2% 4% 2% 6% 5%
Adjusted EBIT 7% 7% 2% 7% 7%
Operating Cash Flow 10% 3% 2% 10% 10%

What makes CGI a quality stock?

Quality stock is the one with high-profit margins, stable cash flows, and a history of maintaining a strong balance sheet. CGI earns one-third of its revenue from government and 22% from financial services. As these markets are stable, the company’s revenue grows low-to-mid single-digit every year.

It has maintained its adjusted EBIT margin at around 14-15% for the last five years. Rising revenue and stable margin have increased its operating cash flow for five years in a row. While the company has a net debt of $2, it’s manageable because of its stable operating cash flow of more than $1 billion.

CGI stock is a long-term bet

CGI’s growing fundamentals have reflected in its stock price, which rose 184% between October 2014 and 2019. The last decade was a period of growth for the company, as many enterprises went digital. The stock rose 465% during the previous 10 years, outperforming the TSX Composite Index, which rose 37%.

It also exceeded peers Accenture and Oracle, which rose 434% and 140%, respectively. If you had invested $1,000 in CGI 10 years back, you would have earned $4,600 by now.

In the second quarter of fiscal 2020, CGI’s backlog and bookings reduced 3.2% and 5.8% as its customers delayed their contracts amid the pandemic-driven lockdown. However, the pandemic has changed the way companies work, and this change will accelerate their move to digitization in the coming years.

Moreover, the ever-growing need for optimization will see increasing adoption of digitization, creating opportunities for CGI.

For instance, Data Bridge expects the global debt collection software market to grow at a compound average annual growth rate of 8.97% in the 2019-2026 period. All of these factors show that CGI has long-term growth potential.

A stock you can buy and hold forever

CGI stock has an average trading volume of 875,000 and has been trading above its 50- and 200-day moving averages for more than five years. However, the March sell-off pulled the stock below its 50-day moving average, creating a once-in-five-year opportunity to buy the stock and hold it for at least 10 years.

If you are a risk-averse investor, CGI can help you earn four times more than other defensive stocks while taking the minimum risk.

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 Puja Tayal has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Accenture. The Motley Fool recommends CGI GROUP INC CL A SV.

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