So CGI is the TSE and MSE's top performing stock for 1997 ...
This thread is now one year old - I just hope that the originator Karen Macaulay actually bought this stock. At any rate, I am certainly grateful to her for having brought it to my attention by starting this thread.
Regrettably, she no longer seems to be on SI so Karen, wherever you are, here are a couple of XOXOXOXOs for you from very highly grateful investor who took your lead and followed up with a visit to their web site and liked what he saw.
But after a rise of 730% in a single year, one needs to reflect and try to figure out where do we go from here with this company. Here are my thoughts.
Positive factors
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1 - Management: very, very strategic in its thinking. The synergistic nature of their acquisitions, the way they manage their "members" (they don't have employees) are but two indicators of that. Their efforts to win business are extremeley focused - they don't go after contracts unless they have an excellent chance of winning. They have successfully integrated 16 acquisitions so far.
Management promotes win-win situations for long term relationships with both clients and employees. Their retention rate for human resources is among the highest in their industry.
Here's an example of win-win at play. Companies want to focus on their core competencies and really don't want to be in the IT business, which they don't really understand anyway. With the Year2000 problem, this is becoming even more apparent - why do they need to pre-occupy themselves with this type of technology issue? Typically, the IT specialists within these firms are also limited by the technology within the company so there may not be much of an opportunity to work on exciting new technologies (e.g. internet, e-commerce).
Now the company (such as Westburne, Spar, Teleglobe etc this year) and CGI strike an outsourcing deal where CGI is given a long term, guaranteed revenue-generating contract and CGI absorbs the company's IT staff. The company can now focus on its core business while leaving all technology issues to CGI, and in most cases being continued to be served by CGI employees already familiar with the company's business and processes. The new CGI members now have a much wider scope for professional development, and that with a growth company that is doing spectacularly well by every conceiveable measure. Of course, having taken over the company's employees, there is no significant ramp up costs to CGI in order to train staff in the client's technology.
So in summary, CGI wins, the company (which expects to save money by outsourcing in the first place) wins and the employees who joined CGI win.
2 - partnerships and clients. Blue-ribbon partnerships with Bell Canada, IBM along with blue-chip clients
3 - Earnings. We're continuing to see triple-digit growth in revenue and earnings while we have yet to see the contribution of TIS taken into account. They will be included in the next quarter.
Order backlog now over $1.3 billion
4 - strong balance sheet with no debt and $12M in cash
5 - the outsourcing business is a cash cow with multi-year contracts, some as long as 10 years. In fiscal 1997, they achieved a 100% renewal from existing clients. More and more of their business is being focused on outsourcing contracts and if I recall, they hope to get to the point where 70% of annnual revenues will come from outsourcing.
6 - focus on financial/insurance applications. These are recognized as a strong growth area for the future. The Interac deal gives them revenue on every single debit card transaction processed by their clients. As Canada opens its doors to more and more foreign firms, CGI is there with packaged solutions (see Republic National Bank deal). With the TIS acquisition (see below), financial services will now account for 58% of revenues. Also the credit union and Desjardins deals will contribute significantly
7 - Year2000. A major source of additional revenue well past the Year2000. It is clear that there won't be enough resources to handle everyone's Y2K problem. My bet is that CGI will focus almost exclusively on Y2K contracts where the possibility of future outsourcing contracts (or other collateral business) is virtually assured.
We see this in the recent PWGSC (Public Works adn Gov't Services Canada) award. Most saw this as a Y2K contract and bid the stock up automatically - then the realization set in that the contract was for some $7M (not that significant for CGI) and it fell back again. What most don't see is the strategic nature of that contract and the possiblity for follow on business in outsourcing.
We need to reflect that PWGSC is THE federal government's agency with overall responsibility for awarding contracts and for managing its financial systems. Not a bad business partner for future government business - with continuing government cutbacks in staff, you can bet that more and more backroom processing will be outsourced.
8 - Software sales. We saw the sale of the AMICUS library management system to the British Library. This system was developed for the Canadian federal government and CGI is having the product marketed world-wide by a European jv partner - I assume that the partner incurs the marketing costs and will share revenue for any sales. In the meanwhile, there is no cost to CGI.
CGI is also the major shareholder in a joint venture called Softkit Technologies which launced two software products this year. I don't have much information on these but more details are available at softkit.com
9 - Expansion into global markets. The acquistion of Teleglobe's Insurance Systems has given it a foothold - TIS is the third largest outsourced supplier of processing services to the property and casualty insurance business in North America and currently generates about 56% of its revenues in the US.
Given the reputation of the British Library, sales of AMICUS to other national libraries is highly likely as well.
10 - no exposure to Asia.
Potential Negative factors
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1 - the P/E ratio as of Dec 31/97 was 116.
Most investors would shun this automatically as being overpriced but if you adhere to Peter Lynch's dictum that the P/E should reflect the company growth rate in terms of earnings, then CGI is not overpriced since growth is still triple-digit. Growth in latest quarterly earnings year-over-year was over 400% while annual earnings growth was 186%.
If you agree with Lynch, the P/E is totally reasonable - if you're a Ben Graham advocate, probably not. If you're Warren Buffet, you probably like this company's franchise (Canada's largest independent end-to-end IT supplier) a lot.
2 - very few outside of the IT business understand CGI's business
This is especially true of fund managers (with the exception of Fidelity and TAL) and financial reporters. Generally, Canadians have a poor understanding of technology stocks and generally buy only what is also traded on Nasdaq (e.g. Newbridge, Corel) and 99% know nothing about stocks that trade on the Montreal exchange. Their loss as they have missed (and continue to miss) excellent IT companies such as CGI, LGS, DTM and ITI.
3 - the threat of Quebec separation
Yes, this is still an issue after 25 years and may never go away from the Canadian landscape entirely. Sentiment in favour of separation is on the wane, but one never knows.
Would separation be necessarily bad for CGI anyway in the long term? It's difficult to say but for the immediate future, it should not be a major concern to investors.
4 - one or more major CGI clients will go out of business and the outsourcing contract will be meaningless. Not likely but always a possiblity I suppose.
In closing, this is as good a summary as I have time to muster but I'll be pleased to provide any informtion that I can that has not been previously posted on this thread.
With $12 million in cash and the annual general meeting coming up later this month, I am looking forward to more pleasant surprises in 1998.
Finally, I should point out that my only association with CGI is as an investor, and admittedly a very happy one at that!
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