On today’s TSX Breakouts report, there are 45 stocks on the positive breakouts list (stocks with positive price momentum), many of which are gold and energy stocks, and 11 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is an oversold stock that appears on the negative breakouts list - CGI Inc. (GIB.A-T).
Since closing at a record high of $159.66 on March 13, the share price has plunged nearly 13 per cent. Before the market opens on May 1, the company will be releasing its quarterly earnings results. For multiple quarters, revenue growth has been declining. If the company announces disappointing numbers and a muted outlook, this could pull the share price down. However, if there is further price weakness, this may represent a buying opportunity for long-term investors.
A brief outline on CGI is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Montreal-based CGI is a leading, global independent information technology and business consulting services firm. The company provides consulting services, technological systems and solutions, and technology servicing outsourced from its clients.
In terms of geographical revenue breakdown, in fiscal 2023 (ending Sept. 30), 31 per cent was from the U.S., 16 per cent from Canada, 16 per cent from France, 11 per cent from the U.K., 6 per cent from Germany, 6 per cent from Finland, 5 per cent from Sweden, and 9 per cent was from the rest of the world.
In fiscal 2023, approximately 36 per cent of its revenue stemmed from government agencies.
The company’s shares are dual-listed, trading on Toronto Stock Exchange under the ticker GIB-A, and on the New York Stock Exchange with the ticker GIB.
According to Bloomberg, the Caisse de dépôt et placement du Québec, an institutional investor with a longer-term investment horizon, has an ownership position of approximately 9 per cent.
Investment thesis
- Attractive revenue mix with a material contribution from government contracts.
- Diversified geographical and industry exposures.
- High backlog, which represents future revenue.
- Healthy balance sheet with $1.141-billion of cash and cash equivalents at quarter-end.
- Acquisition opportunities.
- Reasonable valuation relative to historical levels.
- Potential risk: 1) Decelerating revenue growth. In the first-quarter of fiscal 2024, constant currency revenue growth came in at 1.5 per cent year-over-year. In the fourth-quarter of fiscal 2023, constant currency revenue growth was 2.2 per cent. In the third-quarter of fiscal 2023, constant currency revenue growth was 6.3 per cent. And in the second-quarter of fiscal 2023, constant currency revenue growth stood at 11.4 per cent.
Quarterly earnings and outlook
Before the market opened on Jan. 31, the company reported in-line quarterly financial results.
Revenue climbed to $3.6-billion, up 4.4 per cent year-over-year or up 1.5 per cent excluding negative currency impacts. Adjusted earnings before interest and taxes (EBIT) came in at $584.2-million, up 5.4 per cent year-over-year. The adjusted EBIT margin was 16.2 per cent, down 10 basis points quarter-over-quarter. Earnings per share, excluding specific items, came in at $1.83, a penny above the consensus estimate, and up 10 per cent year-over-year. Bookings totaled $4.19-billion in the quarter with a strong high book-to-bill ratio of 1.16 times. Backlog stood at $26.57-billion, up from $26.06-billion reported last quarter. In fiscal 2023, return on invested capital was 16 per cent, up from 15.7 per cent reported the prior year.
The share price increased 0.8 per cent that day on high volume.
On the earnings call, president and chief executive officer George Schindler signaled conservatism in system integration and consulting (SI&C) spending by commercial clients, “Looking ahead, our overall pipeline for managed services is up year-over-year and sequentially, which we expect will contribute to ongoing bookings strength and future revenue growth. Client demand within the government sector continues to drive strength in our overall pipeline. On a sequential quarter basis, the managed services pipeline for government is up by more than 40 per cent. The pipeline for government SI&C (system integration and consulting) projects is up 20 per cent. We continue to see strong demand related to government priorities for cybersecurity, data analytics and modernization to drive efficiencies and enhance citizen services. While we are beginning to see improving client pipeline for systems integration and consulting across commercial industries, clients continue to exercise caution in their discretionary SI&C spending decisions, given ongoing market uncertainty.” He added, “Our approach is to engage them (commercial clients) in the discussions to prepare for when the spending decisions come. We don’t see them coming yet. I mentioned that in my remarks but we certainly see the pipeline growing. The interest is there but they’re not pulling the trigger quite yet but they are pulling the trigger on the cost utilization, which will only help them to spend more in the back half of the year.”
Before the market opens on May 1, the company will be releasing its second-quarter financial results. Management will be hosting an earnings call that day at 9 a.m. ET. The consensus earnings per share estimate is $1.95.
Returning capital to shareholders
The company currently does not pay its shareholders a dividend.
The company has been actively repurchasing shares as part of its share buyback program. In the first-quarter of fiscal 2024, the company repurchased 874,700 Class A shares at a weighted average price of $133.71.
Analysts’ recommendations
According to Bloomberg, after the company released its first-quarter financial results in January, 13 analysts issued research reports on the company, of which 11 analysts have buy-equivalent recommendations and two analysts have neutral recommendations.
The firms providing research coverage on the company are: ARC Independent Research, BMO Nesbitt Burns, Canaccord Genuity, CIBC World Markets, Desjardins Securities, Morningstar, National Bank Financial, Raymond James, RBC Dominion Securities, Sadif Investment Analytics, Scotiabank, Stifel Canada, and TD.
Revised recommendations
Earlier this month, two analysts lowered their target prices.
- Canaccord Genuity’s Robert Young to $160 from $166.
- Desjardins Securities’ Jerome Dubreuil by $2 to $162.
Financial forecasts
The Street is forecasting earnings per share of $7.68 in fiscal 2024, up 9 per cent from $7.07 (excluding specific items) reported in fiscal 2023, with earnings per share expected to rise to $8.39 in fiscal 2025.
Year-to-date, earnings expectations declined modestly for fiscal 2024 and remained relatively unchanged for fiscal 2025. For instance, at the beginning of the year, the consensus earnings per share estimates were $7.75 for fiscal 2024 and $8.40 for fiscal 2025.
Valuation
The stock is now trading at a slight discount to its historical average.
According to Bloomberg, the stock trades at a price-to-earnings multiple of 16.6 times the fiscal 2025 consensus estimate, below its five-year historical average of 17.4 times. On an enterprise value-to-EBITDA (earnings before interest, taxes, depreciation and amortization) basis, the stock is trading at 10.9 times the fiscal 2025 consensus estimate, just below its five-year historical average of 11.2 times.
The average one-year target price is $161.52, suggesting there is 16-per-cent upside potential.
Insider transaction activity
On March 11, director Gilles Labbé exercised his options, receiving a total of 3,123 shares at an average cost per share of roughly $36.82, and sold 3,123 shares at an average price per share of approximately $156.58, leaving 1,315 shares in this particular account. Net proceeds totaled more than $373,000, excluding any associated transaction fees.
Mr. Labbé is the former president and chief executive officer of Héroux-Devtek Inc. (HRX-T) and is currently the executive chairman of the board of Héroux-Devtek.
On March 11, executive vice-president, legal and economic affairs, and corporate secretary Benoit Dubé exercised his options, receiving a total of 8,000 shares at a cost per share of $48.16, and sold 8,000 shares at an average price per share of approximately $158, after which this specific account did not hold any shares. Net proceeds exceeded $878,000, not including any associated transaction charges.
Chart watch
Over the past seven weeks, the share price has collapsed. On March 13, the share price closed at a record high of $159.66. Since then, the share price is down 12.6 per cent, closing at $139.58 on April 29.
Given the swift decline, the stock has entered oversold territory with a relative strength index (RSI) reading of 30. Generally, an RSI reading at or below 30 represents an oversold condition.
Year-to-date, the share price is down 1.7 per cent, underperforming the S&P/TSX composite index, which is up 5 per cent and relatively in-line with the S&P/TSX information technology sector that is up 0.4 per cent.
Looking at key technical support and resistance levels, the stock price has initial technical support around the $135, $136 levels. There is strong technical support around $130. On a recovery, the share price faces resistance around $150, close to its 50-day moving average (at $150.67). After that, there is a ceiling of resistance around $160, near its record closing high of $159.66.
ESG Risk Rating
According to risk provider Sustainalytics, CGI has an environmental, social and governance (ESG) risk score of 15.6 as of April 27, 2024. A risk score of between 10 and 20 reflects a “low risk” rating.
The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.
This report should not be considered an investment recommendation
Jennifer Dowty