Managed Services And AI Innovations Propel Revenue Growth And Margin Expansion

Key Takeaways

• Strategic acquisitions and investments in IP and Managed Services are expected to enhance capabilities and drive revenue growth.
  
• A strong focus on AI and machine learning is projected to improve efficiencies and contribute to future earnings growth.
  
• Market challenges in Europe and North America, along with FX fluctuations and government shifts, pose risks to CGI's revenue and margins.

Catalysts

Provides information technology (IT) and business process services.

• CGI's Managed Services, with strong book-to-bill ratios, is driving net new recurring revenue, indicating future revenue stability and growth.
  
• The acquisition of Aeyon and investment in IP and Managed Services suggest CGI expects higher revenue and improved earnings from expanded capabilities and client offerings.
  
• CGI's increased focus on AI and machine learning across its product lines could enhance efficiencies and margins, contributing to higher earnings in the future.
  
• Continued investments and a favorable M&A environment, with a strong pipeline of acquisition targets, may lead to revenue and earnings growth through accretive acquisitions.
  
• With a growing client pipeline and strong demand in sectors such as Managed Services, CGI could see increased bookings converting into sustained revenue and potentially improved net margins.

CGI Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming CGI's revenue will grow by 4.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.5% today to 12.8% in 3 years time.
• Analysts expect earnings to reach CA$2.1 billion (and earnings per share of CA$9.81) by about November 2027, up from CA$1.7 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.8x on those 2027 earnings, down from 21.2x today. This future PE is lower than the current PE for the US IT industry at 45.5x.
• Analysts expect the number of shares outstanding to decline by 1.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.96%, as per the Simply Wall St company report.

CGI Future Earnings Per Share Growth

Risks

• The financial services sector in Europe and communications in North America remained challenged due to current market conditions, potentially impacting CGI's revenue from these sectors.
  
• Bookings for strategic IT consulting and system integration were only 85% due to continued softness in discretionary spending, which could hinder revenue growth in this segment.
  
• Margin improvements were partly offset by the impact of lower utilization within financial services in Europe and communication and utilities in North America, affecting net margins.
  
• The impact of FX fluctuations remains significant, as evidenced by the discrepancy in year-over-year growth calculations, which could continue to affect revenues and profits.
  
• Elections and changes in government priorities, as seen with the U.S. Federal segment, could pose risks to future contracts and revenues in government sectors.

Valuation

• The analysts have a consensus price target of CA$167.31 for CGI based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$185.0, and the most bearish reporting a price target of just CA$131.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be CA$16.7 billion, earnings will come to CA$2.1 billion, and it would be trading on a PE ratio of 20.8x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of CA$156.98, the analyst's price target of CA$167.31 is 6.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.