In the medium and long-term, the energy and healthcare businesses provide plenty of growth opportunities. In a changing regulatory and demand context, new and efficient energy sources are being explored, thus creating a considerable demand for industry-specific consulting. The healthcare reform has and will continue to create demand for the firm’s services too, as many companies seek to comply with new regulations while seeking new paths to increased profitability. To fully capitalize on this situation, Navigant Consulting, Inc. (NYSE:NCI) acquired EthosPartners Healthcare Management, Paragon Health, and Easton Associates.
Some analysts argue that Navigant Consulting, Inc. (NYSE:NCI)’s consultant-centered model limits its profit growth potential and generates higher expenses on wages. However, I believe that through compensation expenses, the company pays for its more valuable asset, its counselors, which have been central to client retention and attraction.
Several other growth catalysts can be found within the firm, especially in the mortgage servicing review and credit card litigation segments. Trading at 14.1 times P/E, about a third of the average industry valuation, while offering healthy financials, above average profitability, encouraging results last quarter, and compelling growth opportunities, I’d say that Navigant is a strong buy case.
CGI Group Inc. (USA) (NYSE:GIB): To watch carefully
CGI Group Inc. (USA) (NYSE:GIB) is Canada’s largest IT consulting firm. It has also entered successfully into various European and U.S. markets. Analysts expect growth for the next five years at a 17.25% annual rate, coming from both organic and inorganic sources. Acquisitions have played a highly relevant role in the past and management has proven its skills in choosing and integrating the purchased firms. Organic growth is expected from client stickiness coupled with growing IT budgets and an increasing demand for outsourced IT services in Canada, U.S., and Europe.
However, I would recommend holding due to its lack of a moat against competitors. Not only can its services be replicated to a certain degree, but also, several other companies can offer lower cost, overseas-based services. Although the acquisition of Logica provided considerable penetration and a leading position in the European market, and the American Management Systems and Stanley purchases did similar for its U.S. operations, its lack of presence in emerging, low labor-cost markets makes it less competitive in terms of pricing and global presence. Furthermore, “forty-five percent of CGI Group Inc. (USA) (NYSE:GIB)’s revenue depends on clients’ discretionary spending, and an uncertain macroeconomic environment could curtail this revenue source.” (Morningstar).
In terms of valuation, I feel a little discouraged too. CGI Group Inc. (USA) (NYSE:GIB) trades at 172.4 times its earnings and this doesn’t look very justified by its financials. Margins and returns are very close to zero values, substantially below industry averages, same as its debt to equity relation.
Nevertheless, growth catalysts could pay out. I’d advise keeping an eye on the firm, especially as its cash flows have been consistently high and it has been experiencing several institutional share purchases in the past months.
