Why I’m taking profits in CGI Group

A wise friend and mentor once told me: “No one ever went broke taking a profit.”

That’s reason enough to sell a portion of a stock that has more than tripled in value since I first recommended it in 2012 at $24.42 a share.

But there’s more to the story than that.

First, some background. The company is CGI Group (TSX: GIB.A, NYSE: GIB). Founded in 1976, this Montreal-based multinational is one of the largest independent information-technology and business process services firms in the world. The company delivers an end-to-end portfolio of capabilities, from IT and business consulting to systems integration, outsourcing services and intellectual-property solutions. It employs about 77,500 professionals in offices and delivery centres across the Americas, Europe and the Asia Pacific region. It reported revenue of $11.5-billion in fiscal 2018.

CGI is a company that has grown by acquisition. The latest purchase was announced in late September when the company acquired Sunflower Systems, which provides asset-management software solutions and services. It is based in San Ramon, Calif., with offices in Arlington, Va. Financial details were not disclosed.

“Sunflower Systems brings a portfolio of solutions that enable organizations to improve decision making, accountability, and regulatory compliance for all types of assets including personal and real property, fleet, IT assets, materials and more,” CGI said in making the announcement.

“The merger strengthens CGI’s position serving the needs of commercial entities and federal government agencies, including universities, government contractors, law enforcement organizations, and national laboratories. These will now be offered as a fully integrated solution for budget planning, financial management, acquisitions, and asset management.”

The stock has been performing well. It reached an all-time high of $106.63 in September. It has since pulled back a little, but is still ahead by 320 per cent from my original recommended price.

Financial results have been solid. The company reported strong third-quarter 2019 results recently. Revenue came in at $3.1-billion, up 6.1 per cent from $2.9-billion in the same period of 2018. Adjusted net earnings were $337.2 million ($1.22 a share, fully diluted), up from $309.7 million ($1.08 a share) the year before. Return on equity was 18.1 per cent compared with 16 per cent last year.

But there was one dark cloud in the numbers. Order backlog at the end of the quarter was $22.4-billion, only a shade higher than at the same time a year ago. That appears to indicate a slowdown in bookings.

CGI does not pay a dividend, but the company has been actively buying back shares. During the third quarter, the company invested $516.5-million to buy back 5.3 million shares. Year over year, the weighted number of outstanding shares was down by 10.2 million at the end of the quarter.

Over all, this looks encouraging. So why am I suggesting taking some profits? For starters, the weak increase in order backlog is a concern, especially at a time when world economic growth is slowing. Management remains confident orders will pick up but it’s a cause for concern. Also, the shares look expensive at the current level, with a P/E ratio on the high side at 23.39 (trailing 12 months). Finally, there is no dividend to put a floor under the stock in the event of a market correction.

In those circumstances, prudent investors should consider taking their original stake off the table by selling an appropriate amount to recoup their initial outlay. Once that is done, you’ll be playing with house money.

Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters.