CGI Group Inc. (TSX:GIB.A)(NYSE:GIB) stock rose 3% yesterday after the company reported strong quarterly results. These earnings results showed that CGI is resilient today and that it can be expected to remain so tomorrow.
Let’s take a look at CGI Group’s second-quarter results and try to figure out what the future has in store for the company. Is CGI Group stock a buy today?
CGI Group stock price rallies off of second quarter strengths
In the quarter, revenue rose 2% and adjusted earnings per share rose 3.3% versus last year. This performance reflects a slowdown from prior periods. But it is clearly a strong performance considering the macro environment we find ourselves in today.
On the negative side, there was a drop in backlog (-3.2%) and bookings (-5.8%). The good news here is that management firmly believes that these declines were the result of delays rather than cancellations. A high portion of revenues is from government agencies (34%). With governments’ current focus being on the health crisis, other work has been delayed.
CGI Group’s crisis response has included salary reductions and employees taking leave without pay and/or vacation time. These changes will last as long as needed, with some potentially becoming permanent.
There were also some other bright spots, which management identified on the earnings conference call. CGI Group does a lot of work for essential industries. The health care, utilities, and telecommunication industries account for 20% of CGI Group’s revenue. These industries are critical and demand for CGI’s services has been strong to meet new challenges.
CGI Group stock price has long-term catalysts to continue this rally
CGI Group will be part of the rebuilding process. As CGI Group management stated on the call, “IT will be part of a wide response as the economy restarts.” As the world returns to a “new normal,” CGI’s services will be in high demand. Right now, CGI Group is working with the government on projects in public health and e-learning.
Evolving priorities will make technology more important than ever. For example, CGI Group will see higher demand related to business analytics. Tools for remote workers will be needed and dependence on technology will deepen. There will be a need for digital solutions in all industries to help companies thrive in the new reality.
CGI Group is taking this time to ready itself for acquisitions. The company recently entered into a $750 million credit facility. Its facility now stands at $1.76 billion. CGI has a strong balance sheet with $1 billion in cash and is preparing for its next acquisition. Yes, there will be short-term disruptions in the business. But the goal of doubling the company in the next five to seven years still stands. The company will take advantage of attractive valuations and opportunities that it expects will emerge. We can still expect profitable acquisitions from CGI Group.
Foolish bottom line
The CGI Group stock price rallied yesterday off of its favourable earnings report. The company is in a favourable position for two reasons. Firstly, its solid balance sheet. Secondly, CGI Group’s business is one which can and will help in this crisis and its aftermath. I think the stock is definitely a buy today.
