CGI Stock is a Great Buy-and-Hold Investment

CGI stock has hit an all-time high again, as record backlog, and double-digit revenue growth highlight the strength of this tech business.

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CGI Inc. (TSX:GIB.A) has been an example of discipline as well as operational and financial excellence. It is these qualities that have kept this Canadian tech stock relevant and thriving. And it is these qualities that are taking it to new heights. CGI released strong earnings results this week. As a result, CGI stock rallied more than 4% and is currently trading at all-time highs.

Should you buy?

CGI stock reports another better-than-expected quarter

It is clear from CGI’s recent results that the company is in a very strong demand environment – one that CGI both created and responded exceedingly well to. In fact, CGI is in a sweet spot of many quarters of strong growth and better-than-expected results. Clearly, momentum has been on CGI’s side for some time. CGI’s stock price clearly reflects this.

This quarter (Q2 fiscal 2024) was no different, with double-digit revenue growth rates being accompanied by strong margins. For example, revenue in the quarter increased 11.4%, as Western Europe and the United Kingdom/Australia posted growth rates of 28% and 11% respectively. Also, CGI’s earnings before interest and taxes (EBIT) of $564 million was 13% higher than last year and represented a margin of 15%.

So far in fiscal 2024, CGI has generated over $1 billion in cash from operations, as the company continues to consolidate the very fragmented IT services market. In the last 12 months, cash from operations totaled a hefty $2 billion – making CGI a top tech stock.

Acquisition opportunities remain

In the company’s prior quarter conference call, management stressed that an acquisition was imminent. Today, the mergers and acquisitions (M&A) market has slowed somewhat, but CGI’s “pipeline remains robust.” As such, CGI remains as disciplined as ever, and will only act on an acquisition at the right time, the right price, and with the right fit.

So, CGI still has $1 billion dedicated to this “right” acquisition. In fact, the company currently has $2.8 billion in cash available to fund its shareholder value creation strategy, which includes organic growth, growth via acquisitions, and share repurchases.

Years of rightly timed, well-executed acquisitions have driven solid organic growth and continually increasing margins. This has translated into a top calibre return on invested capital of 15.6%. It has also translated into CGI’s strong global footprint that keeps growing.

This tech stock is looking to the future

The demand environment remains strong at this time, and we have every reason to believe that this will continue as companies look to gain the many benefits of digitization. In fact, management feels that this demand environment is highly visible at this time, and remains patient and disciplined, ready to pounce when the time is right.

All of this bodes well for CGI’s future. On top of this, we have the company’s record backlog numbers, which are providing us with a glimpse into the future. As at the end of the latest quarter, CGI’s backlog stood at a record $25.2 billion, almost 1% higher sequentially.  

So, with this backdrop, we can see how CGI could conceivably continue its meteoric rise. In 2018, CGI’s revenue came in at $11.5 billion. In 2022, it came in at $12.9 billion, 12% higher. Today, CGI’s stock price is trading at 19 times this year’s earnings estimate and 4 times book value – a valuation that is well deserved, as its strong return on equity of 20% and its double digit earnings growth rates have catapulted CGI into an ever-growing leading position.

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 Karen Thomas has a position in CGI. The Motley Fool recommends CGI. The Motley Fool has a disclosure policy.

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