Stock Analysis & Ideas

CGI: Attractive Valuation and Strong Fundamentals Worth Considering

CGI, Inc. (GIB) provides information technology (IT) and consulting services. It operates through the following segments: Northern Europe, Canada, France, U.S. Commercial and State Government, U.S. Federal, U.K., Eastern, Central and Southern Europe (ECS), and Asia Pacific Global Delivery Centers of Excellence (APC).

The Northern Europe segment includes Nordics, Baltics, and Poland operations, the France segment comprises the Luxembourg and Morocco operations, and the ECS segment covers Netherlands and Germany. Finally, the APC segment covers India and the Philippines. The company was founded in 1976 and is headquartered in Montreal, Canada.

I am bullish on GIB stock. It has strong fundamentals, an attractive valuation, and growth in key metrics. Shares of CGI, Inc. have not moved much during the past year, having gains of approximately 5%, while they have minor losses of about 2.4% year-to-date. This year of underperformance creates an investment opportunity, in my opinion.

CGI, Inc. Business News

In early December 2021, CGI announced that it “designed and delivered a mission network management software system to support OneWeb, the low Earth orbit satellite communications company enabling connectivity for governments, businesses, and communities in the optimization, configuration, and operations of its satellite fleet and ground stations.”

Also, the firm, via its subsidiary, CGI Technology and Solutions Australia Pty Limited, signed an agreement to acquire Unico, an Australian technology consultancy and systems integrator company.

Q1 2022 Earnings, Fiscal Year 2021 Results

CGI, Inc. reported a strong Q1 2022 earnings report and full-year 2021 financial results that showed growth in several key metrics.

In Q1 2022, CGI reported revenue of $3.09 billion, up 2.4% year-over-year, and diluted EPS of $1.49, up 12.9% year-over-year (all figures are in Canadian dollars).

“CGI is off to a strong start in Fiscal 2022, with accelerating revenue growth, strong bookings, and double-digit EPS accretion,” said President and Chief Executive Officer George D. Schindler.

Turning to Fiscal Year 2021 financial results, there was notable growth for EPS. CGI reported revenue of $12.13 billion, up 1.1% year-over-year in constant currency, Diluted EPS of $5.41, up 28.8% year-over-year, and cash from operating activities of $2.12 billion, up 9.1% year-over-year.

I like the fact that the firm lowered its debt during Fiscal 2021. As of September 30, 2021, the net debt stood at $2.54 billion, compared to $2.8 billion last year.

Notably, cash of $1.7 billion at the end of September 2021, and the firm stated that it had “available liquidity to pursue its Build and Buy profitable growth strategy.”

Fundamentals and Risks

GIB stock earnings have shown strength and consistency as of Fiscal Q2 2020. Its operating margin is expanding, the balance sheet is strong with a debt/equity ratio of 0.52 as per last quarter, there has been predictable revenue and earnings growth, and the Altman Z-score of 9.6 is strong. Overall, the financial strength is great, and there are no severe warning signs.

Free cash flow growth has been positive and strong. For Fiscal 2021, the company reported free cash flow of ~$1.9 billion (again, in Canadian Dollars), a growth of over 10%.

I also like that there has been growth over the past 10-year period in net income and operating income. The 10-year average growth for net income and operating income is 12.15% and 13.4%, respectively.

Valuation

GIB stock is attractive based on its P/E ratio of 19x compared to the U.S. IT industry average of ~31x and based on its P/B ratio of 3.6x compared to the U.S. IT industry average of ~4x.

Wall Street’s Take

CGI Inc. has a Strong Buy Consensus based on 10 Buys and one Sell rating. The average CGI Inc. price target of $103.31 implies 20% upside potential.

Conclusion

CGI Inc. has delivered a strong Q1 2022 and a solid Fiscal 2021. It has not moved much in the past year. If it continues to deliver strong financial results in 2022, it could regain momentum as its fundamentals are strong and its valuation is attractive.

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