CGI chips away at IT market
[Warning - heavy cynicism ahead]
Analysts see growth potential for computer service
firm, but say it may take some time
Friday, February 5, 1999
GUY DIXON
Investment Reporter
Making little attempt to mince words, Serge
Godin, chairman and chief executive officer of
CGI Group Inc., said during the company's annual
shareholders' meeting, "We are determined to
rapidly become a world champion in the field of
IT [information technology] service."
Name a technology-based company without that ambition?
[Simple Mr. Dixon. Microsoft and SONY are
two of thousands of technology-based companies
that don't aspire to dominate the specialized field
of IT service. Do you really understand what Mr. Godin
was saying, sir?]
And though industry analysts seem to agree that
Montreal-based CGI, the sixth-largest
information technology service and consulting
firm in North America and the leader in Canada,
may be in a better position than some to pull it
off, the question remains "how soon?"
"At this point in time, they are dealing with
hefty backlogs," cautioned Pino Di Roberto, an
analyst at Groome Capital in Montreal, who
currently recommends a "hold" on the stock.
Although he sees CGI as a good stock to own over
the long term, he believes that, in the short
term, the company's plate may be full with
existing computer-service contracts, as well as
the $6.5-billion in backlogged orders, up from
$1.3-billion a year ago.
CGI portrays the backlog as a sure sign of
stable revenue to come.
[Curious choice of the word "portray". If
the backlog it isn't a sure sign of stable
revenue to come, what kind of trick do you
think CGI is trying to pull?]
But it may also curtail CGI's immediate
expansion plans and, in turn, slow short-term
gains in the company's stock price, warned Mr.
Di Roberto, who currently has a $34 target price
for the stock. CGI shares closed yesterday
unchanged at $36 on the Montreal Exchange.
But some others emphasize the company's
long-term growth potential in the information
technology business -- an industry that thrives
on such buzz phrases as "value added,"
"end-to-end solutions" and "critical mass."
"CGI's model is customer focused and delivers
high value-added services," said Rajiv Das, an
analyst at CIBC Wood Gundy Securities Inc. in
Toronto, speaking in the industry's distinct
parlance. Mr. Das has a "strong buy"
recommendation for the stock, with a
comparatively high target price of $50.
[With Mr. Das' track record of past
recommendations for both CGI and BCE Emergis,
we know him to have the requisite understanding of
both technology and his companies' positions
in their competitive domains.]
Despite the challenge in describing exactly what
information technology companies do, analysts
say CGI and its competitors have made it clear
they have a very specific target. They are
increasingly focusing on companies looking to
outsource the development and maintenance of
their computer systems -- the more specialized
the computer system, the higher the revenue for
companies such as CGI.
In July, 1998, CGI took over more of BCE Inc.'s
and subsidiary Bell Canada's computer service
operations. It acquired Bell's information
technology unit, Bell Sygma, which CGI says now
represents a 10-year outsourcing contract with
Bell worth $4.5-billion. The deal has also
increased BCE's stake in CGI shares to 43 per
cent.
A year earlier, in August, 1997, CGI bought the
insurance systems unit of Teleglobe Inc. for
$140-million in cash and preferred shares.
CGI is expected to take this strategy of
focusing on the telecommunications and financial
sectors into the United States, continually
acquiring other companies' computer service
departments as it goes.
"Companies are saying, 'you run my computer
department for me,' " said David Graham, an
analyst at First Marathon Securities in Toronto.
"I have no doubt about the potential growth for
the company," he added, with outsourcing
contracts having grown to 75 per cent of CGI's
total revenue.
But Mr. Graham, like some others, says CGI's
stock price is too high to buy.
Typical of most technology firms, CGI's company
culture is built around its share price, with
most employees (or "members" as the company
calls its workers) profiting from share purchase
plans and following the company's stock price
day to day, if not hour by hour.
[What a cheap shot! - it's especially galling
coming from a writer who can't appreciate that
the company spent from 1976 to 1999 building
its culture around the buzz words he admittedly
doesn't understand.]
CGI stock has recently fetched a higher price
relative to earnings than competitors.
Yesterday, CGI was trading around 120 times
earnings per share. As a rough comparison,
Dallas-based computer service giant Electronic
Data Systems Corp. was around 29 times earnings,
while the smaller Computer Horizons Corp. in New
York was trading around 15 times earnings.
[Mr Dixon, are any of these companies putting out
triple-digit growth in revenues and earnings?
Can Canadians invest meaningfully in EDS and
CHC inside their RRSPs? Can you name just one other
blue chip, profitable Canadian IT outsourcing company for
someone wanting to invest in that type of virtually
recession-proof, recurring revenue business?]
Yet, as the company notes, CGI has a recent
history of stock splits and may vote to do so
again. It performed two-for-one splits in
August, 1997, December, 1997, and May, 1998.
At the shareholders' meeting last week, which
was broadcast live over the Internet, CGI
reported first-quarter profit of $18.2-million
or 14 cents a share, up from $5-million or 5
cents a year earlier.
The company also reported that cash flow
increased to $25.5-million for the quarter ended
Dec. 31, up 75 per cent from $14.6-million a
year ago, which could help the company's ability
to continue to acquire other computer service
firms.
But more relevant to its acquisition plans and
foray into the United States is CGI's listing on
the New York Stock Exchange, which began in
October, 1998. Analysts see the company using
this as a means to entice would-be partners and
for raising capital in U.S. dollars.
In the fourth quarter, 9 per cent of the
company's business was in the United States,
compared with 84 per cent in Canada, and the
remaining 7 per cent primarily centered in
Europe.
Bottom Line
The first hurdle for investors may be getting
past the buzz words. ("Intrapreneurialism" is
one -- an entrepreneurial spirit CGI says exists
within its ranks.)
[If investors don't understand the buzz words
whose concepts may in fact represent the company's
main strengths, perhaps they shouldn't even invest.
Correspondingly, investment reporters shouldn't cover
industries where they can't understand the competitive
advantages that distinguish one player from another.]
The second for some may be the stock price, which
some analysts say already reflects revenue from
CGI's current project roster and therefore may not
go much higher in the short term. But most agree
the company is likely to keep growing and, like
many of CGI's competitors, it may all be a question
of timing.
CGI GROUP: VITAL STATISTICS
Head office: Montreal
Telephone: 514-841-3200
ME symbol: GIB.A
Business: Provides information technology
services and business solutions worldwide.
Share values
Trailing 12-month earnings per share 30¢
Trailing 12-month PE ratio 120.50
A number of limited usefulness as it
includes only 3 months of Bell Sygma
contribution
52-week high $38.25
52-week low $16.65
Last close $36
Change from previous unchanged
1-year total return 106.01%
59-month average annual return 155.69%
Top mutual fund holdings
% of total market value, as of Sept. 30,* as of Dec. 31
Navigator Canadian Growth 7.2
Navigator Canadian Gwth & Income 4.0
Desjardins High Potential Sectors 3.9
@rgentum Canadian Small Co. Port 3.8
Ferique Growth 3.7
CIBC Financial Companies 2.8
Spectrum United Cdn Smll-Mid Cap* 2.8
AIM Canadian Premier* 2.7
Talvest Cdn. Equity Growth* 2.6
CIBC Core Canadian Equity 2.4
Desjardins Growth 2.4
CIBC Capital Appreciation 2.3
CIBC Balanced 2.0
Source: Bloomberg Financial Services;
Datastream; Globe Information Services
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