Skip to main content
inside the market

The fourth-quarter earnings season is just starting to heat up. Roughly 10 per cent of companies in the S&P/TSX composite index have reported quarterly results to date. While it is still early, the bias so far has been negative. Thirty-nine per cent of companies have reported better-than-expected earnings, while 52 per cent have missed the Street's expectations, and 9 per cent have reported results in line with expectations.

In terms of price reactions, any upside move has been rather contained. However, the penalties have been quite severe for several stocks that disappointed the Street. Identifying and avoiding torpedo stocks, those that disappoint investors, can often be more important than being invested in stock winners.

Stocks with the largest downside reactions were technology company Celestica, which tumbled 16 per cent, airline stock WestJet, whose share price fell 11 per cent, and Sierra Wireless, which dropped 24.5 per cent. (The attached table provides a list of companies that have reported to date.)

On the flip side, a company that experienced one of the strongest lifts immediately after reporting financial results was CGI Group, discussed below, with its share price advancing 4 per cent.

The company

CGI Group Inc. (GIB.A) is one of the world's leading independent information technology and business-process services firms.

On Jan. 27, the company reported solid first-quarter fiscal 2016 results and provided a strong outlook. Revenue rose 5.6 per cent year-over-year to $2.7-billion. Earnings before interest and taxes (EBIT) margins increased to 14.3 per cent, up from 13.5 per cent last year. Earnings per share climbed to 84 cents, up 13.5 per cent year-over-year. Return on equity was a solid 16.9 per cent. Order backlog grew to $21.5-billion, up from $20.2-billion reported last year. The book-to-bill ratio was strong at 1.2 times. (A ratio over 1 is positive – more bookings than billings – for the future revenue outlook.) In addition, the company has a healthy balance sheet, with low debt levels and ample cash.

The outlook was equally strong. Management forecasts double-digit earnings-per-share growth in fiscal 2016. The company continues to shift out of non-core, low-margin business. In addition, the company continues to review potential accretive acquisition opportunities, and has the financial flexibility to fund a sizable acquisition.

Returning capital to shareholders

CGI Group does not pay shareholders a dividend but has renewed its share buyback program.

Valuation

According to Bloomberg, the stock is trading at the upper end of its historical trading multiples, and given the company's solid fundamentals and growth, the current valuation appears fair. CGI Group trades at a price-to-earnings (P/E) multiple of 15.4 times the 2017 consensus earnings estimate, and at an enterprise value-to-EBITDA multiple of 9.3 times the 2017 consensus estimate. However, the 2017 forecasts do not take into account any future acquisitions, which would make the company's valuation more compelling.

Analysts' recommendations

According to Bloomberg, there are 15 analysts with "buy" recommendations, five analysts with "hold" recommendations, and no "sell" recommendations. The average one-year price target is $61.88.

Analysts have been revising their earnings-per-share estimates higher for 2016 and 2017. The consensus EPS estimate is $3.50 in fiscal 2016, rising 7 per cent to $3.75 in fiscal 2017.

Trend watch

The stock is trading near a record high, and the long-term uptrend remains intact with the stock price making higher highs and higher lows.

There is technical resistance at $61, and downside support at about $56, close to its 50-day moving average, and failing that, around $52, near the stock's 200-day moving average.

Bottom line

I prefer not to chase a stock, particularly when the high market volatility may provide an opportunity to accumulate shares at a lower price. This is a solid company to buy on weakness.

I strongly encourage readers to consult a financial adviser, and to do their own proper due diligence before taking any investment action.

The author does not personally own shares in the security mentioned in this story.

Jennifer Dowty, CFA, Globe Investor's in-house equities analyst, writes exclusively for our subscribers at Inside the Market.

The fourth-quarter earnings season is just starting to heat up. Roughly 10 per cent of companies in the S&P/TSX composite index have reported quarterly results to-date. The following table provides a list of companies that have reported to-date:

Follow related authors and topics

Authors and topics you follow will be added to your personal news feed in Following.

Interact with The Globe