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Serge Godin, chief executive of CGI Inc. (RYAN REMIORZ/CP)
Serge Godin, chief executive of CGI Inc. (RYAN REMIORZ/CP)

Stock to Watch: CGI shares could pop as key quarter is revealed Add to ...

CGI Group Inc.

Tuesday’s TSX close: $24.05, up 40 cents, or 1.6 per cent

52-week trading range: $17.87 - $27 a share

Annual dividend: none

Analysts’ ratings: There are 14 buys, 5 holds and no sells, according to Bloomberg data. Target prices range from $24 to $35 a share.

Recent history: The stock of the provider of information technology services has been trending higher in recent years. It had languished following a freefall from a high of more than $33 a share in 2000 when the Internet bubble burst. CGI shares also gained momentum after inking a $2.8-billion deal in May to buy rival Logica PLC, an Anglo-Dutch IT firm that had been struggling amid a weak European economy. The acquisition, which closed in August and has more than doubled CGI’s revenues, has catapulted the firm to become the sixth largest pure IT services company globally.

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CGI’s stock, which is up about 24 per cent this year, has lost some steam this month with investors taking profits amid uncertainty about the integration of Logica.

Outlook: The Street will scrutinize CGI closely when the Montreal-based company reports fourth-quarter results on Wednesday. It will be the first time the numbers will include the Logica purchase. The consensus estimate is revenue of $1.68-billion and earnings of 42 cents a share. “The earnings could be muddy because of the costs of the acquisition,” said Lorne Steinberg, president of Lorne Steinberg Wealth Management Inc. “That is what might cause the earnings to possibly miss Street expectations...but whether they beat or miss earnings is irrelevant.”

The Street will focus on guidance on Logica because it is “such a huge transformational acquisition,” said Mr. Steinberg. He does not own CGI stock but rather competitor Hewlett Packard Co., which competes in the IT outsourcing business. “I think the guidance will be positive and the stock will pop,” he said. “CGI has a very good track record at integrating these acquisitions as fast as possible, and making everyone work the CGI way.”

The Street will want to get some feeling as to whether the $200-million in cost synergies expected by the third year will be higher than anticipated, and whether CGI can improve on Logica’s lower margins, said Mr. Steinberg said. “That’s the real juice here...It’s such a huge acquisition that if they guide that things are going along as planned, or costs savings will be even greater, that will have a material impact on the company and the stock price.”

Mr. Steinberg, a value investor who has owned CGI shares in the past, said he would be a buyer of its shares if they pulled back to around $21 a share.

 

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