Why You Should Consider Investing in CGI Group Inc. for Capital Growth

CGI Group Inc. (TSX:GIB.A)(NYSE:GIB) is a pure capital growth investment, and there are many catalysts in the future that could send this stock higher.

| More on:
The Motley Fool

In 2013, CGI Group Inc. (TSX: GIB.A)(NYSE: GIB) was in the news for all the wrong reasons. The Obamacare fiasco put the company in the middle of a heated debate with our neighbors in the south. Add to that the negative press of hedge fund investor Jim Chanos announcing his short position, and we can begin to understand why the stock is only up 12% so far this year.

Aside from that negative press, the underlying business is getting stronger and here are a couple of reasons why I like the company.

Logica restructuring

Back in 2012, CGI made its biggest acquisition in the company’s history by buying Logica PLC—a rival information technology company—and the merger is being implemented ahead of schedule. Management even announced on the last conference call that it was estimating the annualized cost synergies of the merger to meet or even exceed the $375 million target set at the beginning of the year.

European business

As of the last quarter, book-to-bill — the ratio of contracts signed divided by the contracts completed — was 108%. Anything over 100% is good because it indicates that the company can sign orders faster than it can complete them. When you take into account that in its history the company had almost all of its revenue coming from North America, having a more balanced revenue stream can only help mitigate any future economic downturn.

Additional acquisitions

During the last conference call management stated they were looking for additional acquisition. They mentioned that with the Logica merger behind them, cash flows should return to a normal level, giving the company a lot more resources. The company also took advantage of the low level of interest rates to refinance a portion of its debt with a longer maturity, strengthening its balance sheet in the event of an acquisition that would require near term resources.

As I stated in my introduction, this is not an investment for the income investor. The company is not ready to pay a dividend, and the share buyback program is not the principal focal point of management. CGI Group is a complete play on capital growth and with the stock currently trading at a 2014 forward P/E of 14, it is not overly expensive.

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 François Denault has no position in any stocks mentioned.

More on Investing

Close up of an egg in a nest of twigs on grass with RRSP written on it symbolizing a RRSP contribution.
Dividend Stocks

3 Evergreen RRSP Stocks Every Canadian Investor Should Own

If you're looking into RRSP stocks, it's quite likely you've come across these on many, if not all, of the…

Read more »

match strikes and starts a flame
Investing

TSX on Fire: 4 Momentum Stocks to Buy Right Now 

These momentum stocks could continue to outperform in the coming years.

Read more »

A Canada Pension Plan Statement of Contributions with a 100 dollar banknote and dollar coins.
Dividend Stocks

3 Reasons Your CPP Benefits Are More Valuable Than You Think

Holding iShares S&P/TSX Capped Composite Index Fund (TSX:XIC) in a TFSA can supplement your CPP.

Read more »

open vault at bank
Dividend Stocks

Don’t Get Cute; Just Buy Stability: Top Defensive TSX Stocks to Buy Now

A healthy risk tolerance is essential for most investors, but many stray from the tried and tested, hoping to find…

Read more »

TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.
Dividend Stocks

TFSA Investors: Buy These 3 Stocks for $3,480 Yearly Tax-Free Income

One significant benefit of a TFSA-based dividend income is that it doesn’t weigh down your tax bill.

Read more »

a-developer-typing-lines-of-ai-code-while-viewing-multiple-computer-monitors
Tech Stocks

Could Constellation Software Become the Next Berkshire Hathaway?

Constellation Software's (TSX:CSU) capital-allocation strategy is similar to that of Berkshire Hathaway (NYSE:BRK.B).

Read more »

tsx today
Stock Market

TSX Today: What to Watch for in Stocks on Friday, November 8

The TSX Composite benchmark remains on track to end the week with strong optimism as it currently trades with 2.4%…

Read more »

Canadian dollars in a magnifying glass
Dividend Stocks

3 High-Yield Dividend Stocks That Are Screaming Buys Right Now

Are you looking for great income stocks? Here's a trio of high-yield dividend stocks that pay insane yields right now.

Read more »