Canadian Pacific (TSX: CP)(NYSE: CP) reported second-quarter results recently, and it appears to be defying gravity and all naysayers. It delivered another record quarter, the best in the company’s 133-year history and did so despite continued operational challenges in the U.S. Midwest after a harsh winter.

For the second quarter, total revenues increased an impressive 12% to $1.68 billion and operating income grew an astounding 40% to $587 million. Reported net income in the second quarter was $371 million, or $2.11 per diluted share, versus $252 million, or $1.43 per share, in the second quarter of 2013. This represents a 48% year-over-year improvement in earnings per share, and $0.01 better than the consensus estimate.

Here are two important takeaways from Canadian Pacific’s latest earnings release, and what it means for investors.

Exceeding expectations

With two quarters in the books, Canadian Pacific is well on its way to surpassing expectations it set for 2014. So far this year, revenue is up 7% and EPS is better by 33%, exceeding guidance on both accounts. And for the all-important operating ratio, Canadian Pacific’s first half performance of 68.3%, 560 basis points lower compared to the first half of 2013, demonstrates solid progress towards its full-year objective of 65% or better.

It’s important to put this progress, particularly with respect to Canadian Pacific’s operating ratio, into perspective. At the end of 2012, Canadian Pacific’s operating ratio — how much of its revenue goes toward funding operations — was 77%. The company’s goal was to reduce it to 65% by 2015, initially thought impossible by many analysts, appears well in hand. Hunter Harrison, Canadian Pacific’s current CEO, took 12 years to accomplish a similar task when he was at Canadian National Railway (TSX: CNR)(NYSE: CNI), reducing its operating ratio from 77.3% in 1997 to 66.7% in 2009. The team at Canadian Pacific is on track to a similar achievement in just three years.

It appears that if you’ve already designed the playbook, implementing it a second time can be done that much more quickly.

Going with the grain

If there is one area of concern in Canadian Pacific’s second-quarter results, it would be the company’s reliance on grain revenue.

The 13% revenue gain achieved during the second quarter was due primarily to the increased movement of Canadian and U.S. grain. For Canadian grain, revenues were up 32% on 28% more carloads and 34% greater revenue ton miles (RTM). And for U.S. grain, revenue was up 26% for the quarter, driven by 5% more carloads and an 11% increase in revenue ton miles (RTM).

Western Canadian farmers harvested a record 80 million tonnes of grain and oilseed last year, a crop 27% above the previous 2008-2009 record and 37% above the five-year average. And in the U.S., the yield was well above its five-year average. After a slow start, that crop is now getting to market in earnest. And given the sizeable backlog, grain transport should provide a considerable tailwind to Canadian Pacific’s results for the balance of 2014 and into 2015.

But long-term investors should pay careful attention to how a smaller revenue contribution from U.S. and Canadian grain will affect results near the end of 2015, and into 2016.

What’s a Foolish investor to do?

Canadian Pacific stock has been priced for perfection for well over a year – and for investors, it’s delivered. The stock is up 32% YTD, and 62% over the past 12 months. Today, the stock sports a lofty P/E ratio of around 40, the highest among Tier I railroads, along with the lowest dividend yield of 0.70%. Continued strong stock gains will require Canadian Pacific to not only exceed already lofty expectations, but also be supported by a strengthening economy. If either fails to materialize, Canadian Pacific stock may just run out of track.

The post Can Canadian Pacific Railway Maintain its Incredible Momentum? appeared first on The Motley Fool Canada.

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A sure-fire way of identifying investment opportunities is to simply observe your surroundings. What are people using and consuming, and which companies are well positioned to meet those needs over the next five to 10 years?

It seems that nearly everyone in Canada has a smartphone — at least it sure feels that way every time I ride the subway or wait in line at the bank. In fact, according to comScore, more than 17 million Canadians own a smartphone, with users consuming more data every day.

Of course, Canada’s national communications companies have their own list of challenges. For one, the upcoming wireless spectrum auction is sure to be an important milestone in the federal government’s relentless drive to introduce greater competition into the wireless industry. This is in addition to the various disruptive technologies and new business models that are competing with traditional cable television, including Netflix (Nasdaq: NFLX) and Hulu.

Communication and media companies are an important component of the TSX, so it makes sense for an investor to have at least one stock as part of a diversified portfolio. With that in mind, let’s take a look at the case for one company to buy, and one to avoid.

The case for Telus

For Telus (TSX: T)(NYSE: TU), its customers, and most importantly its investors, the future looks very friendly indeed.

No company, excluding monopolies of course, can achieve exceptional financial performance and deliver a market-beating stock performance without satisfied customers. Telus ranked as the top national full-service wireless carrier by J.D. Power and Associates in 2013, and slipped slightly to second place behind SaskTel in the 2014 survey.

That commitment to customer satisfaction is evident in the organization’s financial and operational performance. Telus enjoyed a very strong first quarter — its revenue increased 5% to $2.9 billion, and reported earnings per share increased 9%.

Unlike many of its rivals, its customers are staying put and spending more. It has one of the lowest postpaid churn rates in North America at just 0.99%, and its average revenue per user, or ARPU, grew 2% over the same period a year earlier, to $61.24 per month.

Wireline customers are loving Telus as well, including its new technology. Its TV subscriber base is up 18% from the first quarter of 2013, while high-speed internet connections grew 5.5% to 1.4 million. Its significant investment in broadband technology is paying off, in particular its Optik TV service.

So far this year, the company’s stock is up just over 5%, with a trailing earnings per share ratio of 18.9. Telus releases its second-quarter results August 7.

 The case against Rogers Communications

Unfortunately for Rogers Communications (TSX: RCI.B)(NYSE: RCI) and its current investors, creating a culture that delivers an amazing customer experience is incredibly difficult to achieve — something that Guy Laurence, President and Chief Executive Officer of Rogers, has been hired to do.

However, customers, who usually have less patience than investors, are disconnecting from Rogers. The company ended the first quarter with 71,000 fewer customers than it had at the beginning of the period. Also, they are spending less — Rogers Communications saw its ARPU decline 3.1% in the first quarter.

Mr. Laurence’s plan to turn around the company’s fortunes, called “Rogers 3.0”, includes executive departures and new roles for the son and daughter of the company’s late founder, Ted Rogers. The recently announced plan also features a separate consumer unit. All customer experience functions, including customer care call centres, field operations, and online channels will be brought together into one team reporting to the CEO.

So far this year, its stock has lost nearly 12% and sports a relatively low trailing P/E ratio of 13.5. Investors drawn to the attractive valuation of Rogers would be well served by taking a wait-and-see approach. Improving the customer experience, and achieving better financial and operational performance as a result, will require nothing short of a fundamental cultural shift at Rogers — not an easy task, to say the least.

Rogers Communications releases its second-quarter results on July 24.

The post 1 Communications Stock to Buy and 1 to Avoid appeared first on The Motley Fool Canada.

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Fool contributor Justin K. Lacey has no position in any stocks mentioned.

The smallest of Canada’s big five banks, Canadian Imperial Bank of Commerce (TSX: CM)(NYSE: CM), released its second-quarter results recently. As the last of the major banks to report, its performance is best described as respectable, but with a few caveats.

Compared to the same period a year earlier, revenue was basically flat at $3.2 billion, adjusted net income grew a modest 3% to $887 million, and adjusted diluted earnings per share rose 4%, up $0.08 to $2.17 per share. The bank maintained its leading return on equity, at just over 20% for the quarter.

As you may have noticed, the word “adjusted” appears several times in the above paragraph. So, let’s take a closer look at what went on during the quarter, and what it means for investors.

Caribbean disaster

There were many “adjustments”, or unusual events during the quarter, that hurt reported results, shrinking net income by $581 million and reducing earnings per share by over 65%. The biggest issue relates to the bank’s presence in the Caribbean.

Canadian Imperial Bank of Commerce owns just over 90% of FirstCaribbean International Bank, one of the largest banks in the English- and Dutch-speaking Caribbean, with 3,400 staff and 69 branches. Unfortunately, things aren’t going very well in the region — tourism remains down due to the 2008-2009 financial crisis, impacting many aspects of the economy.

The bank took a charge of $543 million related to FirstCaribbean. It’s important to point out that apart from the $420 million non-cash goodwill impairment charge recognizing the reduced value of its acquisition, it also took a charge of $123 million related to loan losses at its Caribbean bank. The bank called the Caribbean situation very challenging. This may not be the last charge the bank takes against earnings as a result of FirstCaribbean.

Dividend surprise

For the second quarter in a row, the bank raised its dividend. At current levels, its annual dividend of $4.00 equates to a dividend yield of 4.1%, placing it atop Canada’s big five banks.

Though the second raise in as many quarters surprised many, the bank’s payout ratio is forecast to remain well within its 40%-50% target.

An interest in non-interest income

An interesting dimension to the bank’s financial performance that receives less attention is its balance between interest and non-interest revenue.

During the most recent quarter, non-interest revenue represented just 43% of total revenue — the smallest percentage among the large banks. Compare that to Royal Bank of Canada (TSX: RY)(NYSE: RY), where 58% of revenue comes from non-interest segments of the business like investments, insurance, trading, and underwriting.

As consumer lending slows and Canadians reduce their appetite for going further into debt, Canadian Imperial Bank of Commerce’s relative dependence on revenue from loans and mortgages may create a significant headwind to earnings growth over the next few years.

The post 3 Takeaways From CIBC’s Latest Results appeared first on The Motley Fool Canada.

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My kids love puzzles, particularly those that require locating hidden objects in an elaborate scene. As an investor, I like a different type of puzzle.

Recently, I went searching for two stocks with exceptional revenue and earnings growth at relatively modest valuations — not an easy feat in the current market.

My search started by identifying companies with annual revenue growth better than 10%, and earnings-per-share growth in excess of 15%. To ensure quality revenue and earnings, I included only those companies that met my threshold performance figures over an extended period — in this case, the past five years. Quality revenues and earnings are sustainable, and not the result of one-time events.

With growth in earnings exceeding that of revenue, a company is demonstrates efficiency at flowing sales to the bottom line. A better tax rate, reduced overhead, lower input costs, and a smaller share count are all factors that can contribute to superior earnings-per-share growth.

Here are two companies that passed the test, and deserve to be added to your watch list.

1. Gildan Activewear

Montreal-based Gildan Activewear (TSX: GIL)(NYSE: GIL) is the leading manufacturer of T-shirts, fleece, and sport shirts used for screen-printing in Canada and the U.S. If you’ve ever received a golf shirt with your company’s logo on it, it was likely made by Gildan.

However, selling its branded line of attire through retail channels is what’s driving the company’s impressive revenue and earnings growth. Gildan is one of the largest suppliers of branded athletic, casual, and dress socks sold through a wide spectrum of retailers in the U.S., and is now developing into a consumer brand for underwear and activewear.

Gildan plans to implement the same retail strategy here in Canada following ratification of a free-trade agreement with Honduras that will eliminate all duties on clothing made there. Gildan has a large presence in Honduras, with four plants and about 24,000 workers.

Over the past five years, annual revenue and earnings-per-share have grown 12% and 17% respectively. Today, Gildan’s trailing P/E ratio of 20 is a slight discount to its average over the past five years.

2. Stantec

With 13,000 employees in 200 locations throughout North America, plus a few international offices, Edmonton-based Stantec (TSX: STN)(NYSE: STN) is one of the largest planning, architecture, and engineering design firms.

Over the past 12 months, Stantec’s stock is up nearly 60%, compared to a 20% gain for the S&P/TSX Composite Index (TSX: ^OSPTX). With outstanding first-quarter results, the company is off to a solid start in 2014. It has already raised expectations for revenue growth in 2014, and is sitting atop a record backlog.

Over the past five years, revenue has grown 10% annually, and earnings-per-share growth is up 38% per year over the same time period. Today, Stantec’s trailing P/E of 21 is a slight discount to its five-year average.

The post 2 Growth Stocks With Great Profit Potential appeared first on The Motley Fool Canada.

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Bank of Montreal (TSX: BMO)(NYSE: BMO) reported second-quarter results last week. Canada’s fourth-largest bank exceeded expectations. Understanding what drove the results, and how the underlying business is performing, is just as important as headline financial figures.

Compared to the same period a year earlier, revenue increased 9%, net income grew 12% to $1.1 billion, and diluted earnings per share rose 14% to $1.60 per share. The bank also delivered a return on equity of just over 14.3%. Canadian Imperial Bank of Commerce (TSX: CM)(NYSE: CM), the best capital allocator among Canada’s big five banks, delivered a return on equity of nearly 21% during the most recent quarter.

Let’s look at a little closer at how the business is performing, and look for signs on what the future may hold for Bank of Montreal.

All earnings are not created equal

Yes, Bank of Montreal beat earnings expectations, but the reason is important to understand.

Better than expected earnings were due primarily to higher than expected trading volume in the bank’s capital markets division. Capital markets had a profit of $305 million, up 17%, driven by healthy trading in fixed income, currencies, commodities, and equities.

European and U.S. banks have seen trading activity decline over the past year, but Canadian banks have remained immune and experienced continued growth. For how long is an important question, and one that investors should consider before investing.

There is money in wealth management

One of its smallest segments, wealth management, is also its fastest-growing.

Adjusted net income for the segment rose an impressive 36% to $200 million. A big reason for the stellar performance was the 17% increase in assets under management and administration to $612 billion. More assets means more income since the bank takes a small percentage of the money it manages on behalf of clients. Adding new clients was important, but so too was the growth in the value of client portfolios aided by advancing stock markets. When the bull market turns bearish, investors should be watching closely to see if wealth management can grow in both good and challenging markets.

Bank of Montreal also added to its international wealth management capabilities with the recent purchase of U.K.-based F&C Asset Management. With this acquisition, Bank of Montreal serves clients across five continents, with approximately half of its assets under management managed on behalf of clients located outside of North America. Having a truly international wealth management business is becoming increasingly important, and is an important competitive differentiator for Canadian banks.

Dividend growth

Many investors like bank stocks because of the dividend income, but too often we don’t take a close enough look at the track-record for dividend increases.

Bank of Montreal raised its quarterly dividend to $0.78 per share, which equates to a yield of just over 4%. However, its historical rate of dividend increases has not kept pace with other large Canadian banks. Over the past 10 years, Bank of Montreal’s dividend has grown, on average, 9% per year. Royal Bank of Canada (TSX: RY)(NYSE: RY), on the other hand, has grown its dividend by 13% each year. This could make a significant difference to long-term investors.

The post What Investors Need to Know About Bank of Montreal’s Latest Results appeared first on The Motley Fool Canada.

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You don’t need to be a yogi to know Lululemon Athletica (TSX: LLL)(NASDAQ: LULU).

Even if you’ve never been in one of the company’s community-minded stores, attended a yoga retreat, or worn one of its expensive hoodies, the public relations nightmare caused by the way-too-sheer Luon fabric makes it a near certainty that you know Lululemon.

But what about Lululemon as an investment?

Since the summer of last year, when the company began recalling its defective yoga pants, the stock has lost nearly 45%. From its all-time high of just above $80, Lululemon stock now trades for around $43. The stock still carries a premium valuation however, with a price-to-earnings ratio of nearly 23.

Lululemon’s performance for its last fiscal year, which ended in February, was well received by the market. Net revenue increased 16% and earnings per share rose 3%, pushing the stock nearly 15% higher during February before giving back those gains over the past three months.

Vancouver-based Lululemon is scheduled to announce its first-quarter results next week. Here are two metrics that investors should be watching closely.

Same-store sales

Lululemon generates revenue of around $1,900 per square foot annually from its physical stores, more than any of its competitors — even more in its well-established Canadian stores, but less in U.S. locations.

As Lululemon implements its plans for international expansion, investors need to watch this figure closely and see if the productivity of Canadian stores can be replicated in those outside of the country.

Comparable same-store sales figures are also worth watching. During its last fiscal year, Lululemon grew same-store sales by 4%, but during the latest quarter, same-store sales contracted by 2%. Since the company reports in American dollars, the weaker Canadian dollar made matters worse. Same-store sales growth in the second quarter will do a lot to reassure investors and analysts that Lululemon is moving in the right direction.

Online sales

Direct-to-consumer revenue from products sold on its website increased 33% last year and accounted for 16.5% of total company revenue. Lululemon has a goal of achieving 20% of total company revenue from its online shopping platform.

The company does not break down the operating margin for products sold online, but a safe assumption is that it’s higher than what’s achieved in brick and mortar stores. If Lululemon discovers that its online presence is simply taking existing customers out of physical stores, it better be.

Investors should be watching the success of Lululemon’s online merchandising strategy — its higher margin should provide a boost to the company’s earnings per share growth.

The post 2 Key Metrics to Watch When Lululemon Athletica Reports Earnings appeared first on The Motley Fool Canada.

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After a severe winter that presented unparalleled operational challenges, the railways appear to be regaining lost momentum.

Despite record-breaking temperatures that affected much of Canada and the U.S. in December and January, the first quarter results for most of North America’s leading railroads exceeded expectations. It should be pointed out, however, that forecasts were lowered somewhat as analysts factored in the impact of cold weather on railroad operations.

When it’s extremely cold for extended periods of time, railways aren’t terribly efficient. They need to run shorter trains, use more locomotives, and spend more money on fuel and labour. But with spring in the air, and summer just around the corner, freight is moving with greater speed and efficiency along the rails.

Despite the temporary, weather-related challenges, long-term railroad investors have done very well. Over the past five years, the Dow Jones U.S. Railroads Index is up approximately 220% compared to a gain of just over 100% for the S&P 500.

As long-term investors, we seek companies that offer the best opportunity to achieve market-beating returns. So, with this in mind, here are a few thoughts on one railroad you should consider buying, and one that you should avoid.

The case for Canadian National

Canadian National Railway (TSX: CNR)(NYSE: CNI) is North America’s second-largest railroad, and its most efficient.

Canadian National achieved railroad supremacy by relentlessly focusing on its operations. Its operating ratio, the percentage of revenue consumed by operations, has declined from the high 90s in 1993 to 89% in 1995, and now sits at 69.6% for the first quarter of 2014. A low operating ratio allows more revenue to flow to the bottom line as profit, and provides added flexibility to use price strategically to win new business.

And then there is Chicago. If you travel by air frequently, you likely avoid connecting through Chicago during the winter if at all possible. Railroad operators feel the same way.

With the 2008 purchase of Elgin, Joliet, & Eastern Railway Company, Canadian National became North America’s only transcontinental railway. It established a bypass around the western side of the heavily congested Chicago-area rail hub, alleviating substantial bottlenecks for both regional and continental rail traffic entering and exiting Chicago freight yards.

The benefit of that purchase was evident in Canadian National’s first quarter. Unlike competitor Canadian Pacific (TSX: CP)(NYSE: CP), which moved 5% fewer revenue-ton-miles during the quarter, Canadian National actually moved 5% more RTM.

In terms of valuation, Canadian National is not the least expensive railroad stock, but it is definitely of the highest quality. Steady and consistent revenue growth; modest improvements in its operating ratio, strong cash flow, a growing dividend; and an effective management team make for a compelling investment thesis.

The case against Canadian Pacific

There is no debate — Canadian Pacific has enjoyed an incredible run since Hunter Harrison was appointed its Chief Executive Officer in June 2012. Over the past two years, Canadian Pacific stock has appreciated nearly 130% compared to a much more modest gain of 29% for the S&P/TSX Composite Index (TSX: ^OSPTX).

Today, Canadian Pacific is priced more like a technology growth stock than a railroad. Its trailing and forward price-to-earnings ratios trade at significant premiums to their five-year averages. With a price-to-earnings ratio of 36, Canadian Pacific is the most expensive Class 1 railroad by a wide margin. For comparison, competitors Union Pacific (NYSE: UNP) and Canadian National have P/E ratios of 20 and 21 respectively.

It appears that Canadian Pacific’s largest shareholder has noticed the lofty heights reached by its stock. According to INK Research, Bill Ackman of Pershing Square Capital recently sold 3.2 million shares of its stake in Canadian Pacific for $533 million.

Priced to perfection is the best way to characterize Canadian Pacific’s stock. If the management team is unable to deliver, and possibly surpass, expectations for earnings-per-share growth exceeding 30% in 2014, the stock is guaranteed to disappoint investors.

The post One Railroad Stock to Buy and One to Avoid appeared first on The Motley Fool Canada.

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The Bank of Nova Scotia (TSX: BNS)(NYSE: BNS) reported second quarter results last week. By most measures, the performance turned in by Canada’s third-largest bank surpassed analysts’ expectations.

Compared to the same period a year earlier, revenue increased 10%, net income grew 14% to $1.8 billion, and diluted earnings per share rose an impressive 14%, up $0.17 to $1.39 per share. The bank also delivered return on equity of 16.3%, a slight deterioration from the same period a year earlier. For comparison, Canadian Imperial Bank of Commerce (TSX: CM)(NYSE: CM) has the best return on equity of Canada’s big five banks at nearly 22%.

Now that the dust has settled on earnings season for Canada’s major banks, let’s dig a little deeper and extract a few key takeaways from the Bank of Nova Scotia’s most recent quarter.

Balanced growth across most segments

Most segments delivered solid growth, particularly Canadian banking and global wealth and insurance. That’s good because these two divisions account for just over 50% of earnings.

Net income for Canadian banking was up 12% year over year, driven by solid loan growth — the bank registered double-digit volume increases in both credit card and consumer auto loans.

However, provisions for credit losses, or PCL, increased slightly during the quarter. This is nothing to be too concerned about at this stage, but it was a bit of a surprise and something analysts and investors will be watching closely in upcoming quarters.

Global wealth and insurance also enjoyed a strong quarter with earnings up 11% year over year, driven almost entirely by a strong performance in the wealth management segment. Assets under management grew a remarkable 18%, driven by the addition of new clients and portfolio growth among existing clients. The bank earns a small percentage, annually, based upon the amount of assets it manages on behalf of clients — more assets means more income.

But no growth in international banking

Despite the overall strong quarter, the performance of its international banking segment was surprisingly weak.

The Bank of Nova Scotia is the most international of Canadian banks, and is viewed by many investors as a conservative way to gain some emerging market exposure. The international banking segment is the second most important for the bank, and accounted for 26% of second-quarter earnings.

However, earnings growth was basically flat for the segment compared to the same period a year earlier. Strong deposit and loan growth, of 16% and 14% respectively, was offset by lower net interest margin and higher provisions for loan losses among business customers. Net interest margin, or NIM, measures the difference between interest income earned on loans and interest paid to lenders for deposits. The higher the better, at least from investors’ and the bank’s perspective — not so much for customers.

Increased potential for acquisitions

The market was surprised when Bank of Nova Scotia announced plans to divest most of its 37% stake in CI Financial (TSX: CIX). With over $97 billion in assets under management, CI Financial is one of Canada’s top asset managers.

Given Bank of Nova Scotia’s focus on growing its wealth management business internationally, as opposed to within Canada, the move shouldn’t be a complete surprise. Canadian banks in general are sitting on excess capital, and once it sells the majority of its stake in CI Financial, worth $2.3 billion-$2.6 billion, it will be in an excellent position to drive growth internationally through acquisitions, particularly in its wealth management business.

An emerging opportunity

The Bank of Nova Scotia offers investors a fairly valued stock, and a dividend yield of 3.7%. In addition, and of particular importance to long-term investors, it provides a relatively low-risk way to gain emerging market exposure. It targets countries that have sound economic policies, a growing middle class and an increasingly educated population. Over the long term, the Bank of Nova Scotia should benefit as growth in these economies accelerates.

The post What Investors Should Know About Bank of Nova Scotia’s Latest Results appeared first on The Motley Fool Canada.

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Successful investing requires analyzing financial reports, evaluating a company’s growth prospects, and assessing whether a company has the right management team. A shortcut, used by some traders, is to rely on insider activity to guide investing decisions. Insiders, which includes senior officers and directors, need to disclose their purchases and sales of company stock.

According to INK Research, CGI Group (TSX: GIB.A)(NYSE: GIB) had the third-highest dollar volume of insider selling on the Toronto Stock Exchange over the past 60 days — nearly $60 million of stock. With a presence in the Americas, Europe, and Asia-Pacific, CGI provides end-to-end IT consulting, outsourcing, and systems integration services to customers within specific sectors, including government, healthcare, financial services, and telecommunications.

For bottom-up, long-term investors, insider activity is just one piece of information to consider. Like every investor, insiders have their own reasons for buying and selling, and their actions may not be a clear signal on where the stock price is headed.

Apart from insider activity, let’s take a closer look at the case for, and against, an investment in CGI Group.

The case for CGI Group

CGI had a solid second quarter that saw profit more than double, driven by a 7% rise in revenue and strong European orders.

The company booked $2.9 billion in new business during the quarter, and reported a book-to-bill ratio of 105%. Book-to-bill is the ratio of orders added to the company’s backlog versus completed work that’s been billed to clients. A ratio over 100% means CGI is winning work faster than it’s completing existing orders, and increasing backlog. CGI’s acquisition of U.K.-based competitor Logica in 2012 for £1.7 billion appears to be paying off — the company recorded a book-to-bill ratio of 110% in Europe compared to just 98% in North America.

Despite the strong quarter, CGI has lost 6% of its value over the past six months compared to a 9% gain in the S&P/TSX Composite Index (TSX: ^OSPTX). It’s currently trading 9% below its 52-week high. Today, CGI offers investors an attractive valuation. Its trailing and forward price to earnings ratios trade at a slight discount to their five-year averages. Its forward PEG, which is the forward P/E ratio divided by the five-year forecasted growth rate, is just 0.6 — significantly lower than the five-year average of 1.1.

The case against CGI Group

Reduced U.S. government spending on IT-related services and the issues surrounding the troubled roll-out of President Obama’s healthcare website are two reasons why CGI’s book-to-bill ratio for North America slipped below 100% for the most recent quarter. CGI Group’s contract to manage the online U.S. health exchange program was subsequently not renewed.

The business of IT outsourcing, systems integration, and consulting is very competitive, and pricing pressure is sure to increase as competitors try to capitalize on CGI’s recent missteps in North America.

Then there is the issue of CGI’s dual-share structure. Thanks to the company’s Class B shares, the direction of the company is tightly controlled by the company’s co-founders. Good corporate governance usually requires that equity ownership and voting rights go hand in hand — not so at CGI.

Finally, because CGI reports in Canadian dollars, its results are positively impacted by a lower Canadian dollar relative to a range of currencies it does business in. The Canadian dollar has lost nearly 10% of its value compared to the U.S. greenback over the past 18 months. Any appreciation in the value of the loonie from current levels will hurt CGI’s financial performance.

So should you invest?

CGI is among the world’s five largest computer services companies. And with a market capitalization of $11.3 billion, CGI is nearly three times larger than Canada’s best known technology brand, BlackBerry (TSX: BB)(NASDAQ: BBRY).

CGI has grown to approximately 68,000 employees, and has proven adept at identifying and acquiring companies that can be successfully integrated into its business model. And it’s delivered for investors, gaining nearly 300% over the past five years.

CGI is a Canadian success story, even if it’s not as well-known as BlackBerry. I don’t think CGI is going anywhere but up over the next five to 10 years; it offers an excellent opportunity for long-term investors to achieve market-beating returns.

The post Insiders Are Selling CGI Group: Should You? appeared first on The Motley Fool Canada.

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Royal Bank of Canada (TSX: RY)(NYSE: RY) kicked off the Q2 earnings season for Canada’s major banks late last week. By most measures, our nation’s largest bank set the bar very high.

Compared to the same period a year earlier, net income increased 15% to $2.2 billion, and diluted earnings per share increased 18%, up $0.22 to $1.47 per share, easily surpassing expectations. Maintaining its position as one of the strongest capital allocators among Canadian banks, Royal Bank delivered a 19.1% return on equity during the quarter.

There is very little to dislike in Royal Bank’s latest quarter. Apart from the insurance segment, which experienced a slight deterioration in net income due to higher international claim costs, every other part of the business delivered impressive bottom-line growth.

For investors, it’s important to understand that over the past 12 months, just three segments accounted for 88% of the income generated by Royal Bank — personal and commercial banking, capital markets, and wealth management.

Let’s take a closer look at these three critical segments to better understand what’s driving performance and what to watch over the coming year.

Personal and commercial banking

By far the largest contributor to net income at 54%, personal and commercial banking income grew 7% compared to the second quarter of 2013, driven primarily by volume growth and low loan-loss provisions.

Royal Bank is the market share leader in most product categories. With nearly 24% of the Canadian market for personal loans, including residential mortgages and credit cards, and between 25% and 30% of the market for business loans and deposits, Royal Bank is extremely dependent on the performance of the Canadian economy. The outlook for our economy is encouraging, with a slowly declining unemployment rate and increasing gross domestic product.

However, investors should pay close attention to Royal Bank’s net interest margin, or NIM. It measures the difference between interest income earned on loans and interest paid to lenders for deposits, relative to the amount of interest-earning assets held by the bank. Royal Bank’s NIM has held steady for the past few quarters at around 2.74%, but in the current low-interest and highly competitive environment, it may further contract, negatively impacting earnings for this important business segment.

Capital markets

Capital markets provides corporate and investment banking, equity and debt origination, and distribution to public and private companies, investors, and governments in North America, Europe, and Asia. Net income for the second quarter was $124 million, an impressive increase of 32% over the same quarter a year earlier.

But unlike personal and commercial banking, Royal Bank’s capital markets segment is not nearly as dependent upon Canada for success. During the second quarter, the U.S. accounted for 55% of revenue, with Canada representing just 28%. However, there are many clouds on the horizon. Regulator reforms, ongoing European sovereign debt concerns, and uncertainty regarding the direction of U.S. fiscal and monetary policy are a few issues that that should get investors’ attention, as they will likely impact earnings for Royal Bank’s second largest segment.

Wealth management

Accounting for 11% of earnings over the past 12 months, wealth management may prove to be the primary growth driver for Royal Bank over the medium to long term. During the second quarter, earnings of $278 million represented an increase of 25% compared to the same period a year earlier.

Royal Bank’s wealth management income is based upon a percentage of the assets it manages for its high net-worth, and ultra-high net-worth clients. The record earnings in Royal Bank’s wealth management segment were the result of a 15% increase in assets under management — driven by both new clients and the growing portfolios of existing clients.

Bank of Nova Scotia (TSX: BNS)(NYSE: BNS) shocked market watchers recently when it announced plans to divest its 37% stake in CI Financial (TSX: CIX), one of Canada’s premier asset managers with over $97 billion in assets under management. Royal Bank is focused on growing its wealth management business in the U.S. and internationally, so a play for CI Financial is unlikely. However, investors should watch for Royal Bank to make potential high net-worth distribution acquisitions outside of Canada’s borders.

The future looks very profitable for Royal Bank, and its investors

Royal Bank is Canada’s largest bank by market capitalization, fifth-largest in North America, and 12th largest in the world. And that kind of scale provides a host of advantages — Royal Bank is one of the most productive banks in Canada. With an efficiency ratio of 45%, calculated as non-interest expense divided by total revenue, more revenue finds its way to the bottom line.

Big and efficient: That’s a powerful combination for continued earnings growth, and necessary to support ongoing dividend raises. Over the past few years, Royal Bank has developed a pattern of increasing its dividend during the first and third quarters. With a current yield of 3.8%, investors should look for an increased dividend payment to be announced during Royal Bank’s third quarter.

The post What Does the Future Hold for Investors in Canada’s Largest Bank? appeared first on The Motley Fool Canada.

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