CGI Inc.

CGI Inc., whose name is an acronym for Consultants to Government and Industries, is a Canadian global titan in the field of `Information Technology (IT)` and business consulting services. Founded in 1976 by Serge Godin and André Imbeau, CGI has grown from a two-person startup into a massive enterprise primarily through its celebrated `Build-and-Buy Strategy`. The “build” part focuses on winning new business organically, while the “buy” part involves a highly disciplined approach to `Mergers and Acquisitions (M&A)`, with the 2012 acquisition of the European firm Logica being a landmark example. CGI partners with clients—often large corporations and government agencies—on long-term contracts to manage their IT infrastructure and business functions, a practice known as `Outsourcing`. This business model creates a very “sticky” customer base and predictable revenue streams, qualities that are music to a value investor's ears. The company famously operates under a `Dual-Class Share Structure`, which gives its founding members enhanced voting control, a feature investors should always be aware of.

CGI’s long-term success isn’t an accident; it's the result of a well-honed and consistently executed operational framework. Understanding its core pillars is key to appreciating the company's investment thesis.

This two-pronged strategy is the heart of CGI’s value creation.

• Build: This is the organic growth side of the equation. CGI focuses on establishing deep, long-lasting relationships with its clients. Instead of just completing a project and leaving, they aim to become an indispensable part of the client's operations. This is driven by their “Proximity Model,” which stations CGI decision-makers physically close to their clients to foster trust and better understand their needs.
• Buy: This is where CGI has truly distinguished itself. The company is a masterful acquirer. It targets IT services firms, often in new geographies or sectors, and integrates them with ruthless efficiency. Their playbook involves standardizing processes, cutting redundant costs, and improving the acquired company's `Operating Margin` to match CGI’s high standards. This disciplined approach to `Capital Allocation` has been a powerful engine for growth and shareholder returns.

In its early days, much of CGI's business was staff augmentation—essentially renting out its tech experts. Today, the company has increasingly shifted towards higher-margin services. This includes selling its own proprietary `Intellectual Property (IP)`—unique software solutions for specific industries like banking, healthcare, or government. It also focuses on “managed services,” where it takes full responsibility for a client's entire IT function under a multi-year contract. These contracts provide highly predictable, `Recurring Revenue` and lock clients in, creating a powerful competitive advantage.

From a value investing standpoint, CGI exhibits many characteristics of a high-quality compounder. However, like any investment, it comes with its own set of risks.

A company's “moat” is its ability to protect its profits from competitors. CGI's moat is built on several factors:

• High `Switching Costs`: Once CGI's systems are deeply embedded in a client's operations (e.g., managing a bank's core payment system or a city's utility billing), switching to a competitor is incredibly expensive, risky, and disruptive. This inertia keeps clients locked in for years, sometimes decades.
• Proven `Capital Allocation` Skills: Management has demonstrated over decades that it can deploy capital intelligently. Whether it's making smart acquisitions or buying back its own shares, the leadership team has a superb track record of creating value. Their ability to consistently generate a high `Return on Invested Capital (ROIC)` is a testament to this skill.
• Scale and Reputation: As one of the largest players in the world, CGI has the scale and reputation to compete for and win the largest and most complex government and corporate contracts.

• Acquisition Risk: While CGI is great at M&A, there's always a risk that a future large-scale acquisition could be poorly integrated, overpaid for, or simply a bad cultural fit, leading to significant writedowns.
• Competition: The IT services industry is fiercely competitive, featuring giants like Accenture, Capgemini, and IBM, as well as nimble, specialized players. CGI must constantly innovate to stay ahead.
• Technological Disruption: The tech world moves at lightning speed. The rise of cloud computing, artificial intelligence, and new software models requires CGI to constantly adapt its offerings and expertise. A failure to keep pace could erode its competitive position.

When analyzing CGI, investors should pay close attention to a few key performance indicators:

1. `Revenue Growth`: It's important to separate organic growth (from the “build” side) from acquisition-fueled growth (from the “buy” side). Strong organic growth is a sign of a healthy underlying business.
2. Operating Margin: Watch for margin expansion, especially after a large acquisition, as it indicates successful integration. A stable or growing margin is a sign of pricing power and operational efficiency.
3. Return on Invested Capital (ROIC): This is arguably the most important metric for CGI. A high and sustained ROIC proves that management is investing capital in projects and acquisitions that generate returns well above their cost of capital.
4. `Free Cash Flow (FCF)`: CGI is a cash-generating machine. Strong FCF is what fuels the “buy” strategy and share repurchases without excessive reliance on debt.