Multiple TP Raises & Rating Changes ... Even with recent “robust” gains, Desjardins Securities analyst Jerome Dubreuil continues to see CGI Inc. (
) as “attractive” to investors, citing its " defensive attributes, growing margin profile, sustainable mid-single-digit growth, strong FCF conversion and leverage around 1.0 times.”
Before the bell on Wednesday, the Montreal-based business and technology consulting firm reported revenue of $3.715-billion, up 13.7 per cent year-over-year and above the estimates of the analyst ($3.53-billion) and the Street ($3.56-billion). Adjusted fully diluted earnings per share rose 18.9 per cent to $1.82, also topping expectations ($1.70 and $1.71, respectively).
In a research note titled Cruising through the uncertain macro context, Mr. Dubreuil said the company’s organic growth of 9 per cent year-over-year was “more sustained than expected.”
“We do not think the buy side considers GIB a high-single-digit organic growth stock and, therefore, quarters such as the last two have been a positive surprise,” he said. “That being said, we believe M&A will eventually contribute to organic growth and previous acquisitions are now further in the past. We have increased our top-line forecast and now expect 5.1-per-cent growth in FY24, which appears achievable in light of recent results.”
“While CGI recognized that some clients in certain segments were a bit more hesitant to pull the trigger on new deals (and that the business is not 100-per-cent immune to macro headwinds), management did not seem as concerned as some of its peers during the 2Q FY23 call. Indeed, CGI has historically used prudent strategies, and its recent share price performance signals that the market is now recognizing this, which is especially attractive in the current macro context. Even though there is not as much upside in the stock now as there used to be, in our view the company has what it takes to capitalize on opportunities when others are fearful, especially with leverage currently standing at 1.0 times.”
One of several analysts on the Street to raise their forecast for CGI, Mr. Dubreuil raised his target for its shares to $155 from $145, reaffirming a “buy” recommendation. The average is $147.15.
Others making changes include:
* Canaccord Genuity’s Robert Young to $155 from $135 with a “buy” rating.
“In the near term, we view complementary M&A and continued enterprise spend on IT modernization and optimization as tailwinds for CGI’s stock, which is up 17 per cent year-to-date,” said Mr. Young. “We believe the market is attaching a premium to strong execution, long-term contracts in defensive end markets, and a solid balance sheet. We believe conversion of elongated managed services contracts and margin expansion are catalysts for further upside in addition to our raised estimates. We are reiterating our BUY rating and raising our target price.”
* RBC’s Paul Treiber to $155 from $145 with an “outperform” rating.
“Q2 was one of CGI’s strongest quarters, as organic growth reached new highs, whereas consensus assumed deceleration. CGI is executing very well, as shown by broad-based organic growth and margin expansion. We’re increasing our estimates but still assume organic growth slows. A meaningful ramp in managed services could drive upside to our estimates,” said Mr. Treiber.
* Scotia’s Divya Goyal to $155 from $140 with a “sector outperform” rating.
“CGI continues to be our top pick given the premium quality of the business,” she said. “We get asked all the time whether the CGI stock is already at its peak – we say ‘No’. CGI is a high-quality business led by a seasoned management team which does not rush into decisions. So, while the company maintained a muted stance in 2020/2021, insulating and nurturing its underlying business, resulting in a slower growth, the company’s investments are now starting to shine through. We believe the company has a long runway ahead given it can continue to maintain and sustain its M&A and IP growth strategy.”
* Stifel’s Suthan Sukumar to $155 from $140 with a “buy” rating.
“The company posted its 5th consecutive quarter of double-digit growth, coupled with continued margin expansion, while certain global IT peers are grappling with slowing growth and margin erosion amidst a more challenging and uncertain macro backdrop,” said Mr. Sukumar. “We believe this underscores CGI’s competitive positioning with a local client proximity model and end-to-end offering, allowing them to benefit early from the shift in IT spend priorities to cost-cutting and near-term ROI initiatives, as reflected in a growing pipeline of larger, multi-year managed services deals (up 20 per cent quarter-over-quarter). With bookings and backlog growth providing solid visibility ahead, we see a continued outlook for healthy revenue growth with margin expansion. We raise our target price ... on higher estimates. We see CGI’s strong, consistent execution, defensive characteristics, and M&A optionality supporting a valuation premium vs. peers.”
* CIBC’s Stephanie Price to $150 from $146 with an “outperformer” rating.
* Raymond James’ Steven Li to $150 from $138 with an “outperform” rating.