Acquisitions And Managed Services Will Expand Market Presence

Key Takeaways

• Strategic acquisitions and investments in AI, cybersecurity, and cloud services are driving market expansion and aligning with client modernization priorities.
  
• Enhanced managed services contracts and restructuring efforts in Europe support sustained revenue growth and improved operational efficiency.
  
• Integration challenges and macroeconomic uncertainties may temporarily impact margins and revenue growth despite strong bookings and managed services focus.

Catalysts

Provides information technology (IT) and business process services.

• CGI's acquisitions, particularly in the U.K., Germany, Spain, and upcoming Apside in France, Canada, and more, are expanding their market presence. This broadens their client base and is expected to increase revenue through enhanced service offerings and regional diversification.
  
• There's a substantial increase in CGI’s managed services contracts, indicating strong demand for cost-saving solutions. This should positively impact revenue as managed services often involve long-term contracts with steady income streams.
  
• CGI has made significant investments in AI, cybersecurity, and cloud services, which align with current client priorities for modernization and digital transformation. These investments are poised to enhance their service portfolio and drive future revenue growth.
  
• The restructuring plan, particularly in Continental Europe, aims to improve operational efficiency and margins by addressing underperformance and optimizing resource utilization.
  
• The expansion of CGI’s strategic managed services and IP solutions, alongside strong bookings in financial services and government sectors, illustrates a robust pipeline. This should support sustained revenue and earnings growth as these projects are realized.

CGI Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming CGI's revenue will grow by 6.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.7% today to 12.4% in 3 years time.
• Analysts expect earnings to reach CA$2.2 billion (and earnings per share of CA$9.74) by about May 2028, up from CA$1.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.6x on those 2028 earnings, up from 19.1x today. This future PE is greater than the current PE for the US IT industry at 10.5x.
• Analysts expect the number of shares outstanding to decline by 1.67% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.74%, as per the Simply Wall St company report.

CGI Future Earnings Per Share Growth

Risks

• Restructuring costs and the integration of acquisitions like BJSS and Daugherty may temporarily dampen margins, impacting net earnings as the company seeks to improve utilization and align these acquisitions with CGI’s profitability standards.
  
• Continued weakness in the Continental Europe markets, particularly affecting the manufacturing and telecommunications sectors, could restrict revenue growth if economic conditions do not improve.
  
• Despite a strong backlog and book-to-bill ratios above 1 in several regions, lower-than-average book-to-bill ratios in business and strategic IT consulting, especially below 1 in certain segments, point to potential future revenue constraints if these continue.
  
• Increased cost pressures and macroeconomic uncertainties, including tariffs and geopolitical dynamics, may prompt clients to delay or reduce IT spending, potentially impacting CGI’s revenue from consulting projects.
  
• The focus on large-scale managed services contracts with multiyear durations may delay the recognition of revenue, slowing short-term revenue growth despite strong bookings.

Valuation

• The analysts have a consensus price target of CA$177.077 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$190.0, and the most bearish reporting a price target of just CA$136.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$17.7 billion, earnings will come to CA$2.2 billion, and it would be trading on a PE ratio of 21.6x, assuming you use a discount rate of 7.7%.
  
• Given the current share price of CA$148.57, the analyst price target of CA$177.08 is 16.1% higher.
  
• 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.