Chapter 5

The De-Rating

CGI's shares have fallen about a third in a year, from roughly C$132 to C$94.85, and now trade near 10 times forward earnings against a five-year average close to 20. The instinct is to read this as a company-specific discount. The evidence points the other way: the multiple compressed while earnings kept rising, and it compressed alongside the entire labor-based IT-services sector, not below it. On forward earnings CGI is priced at a modest premium to Accenture, Capgemini and Cognizant — not a bargain within its group, but a quality business repriced with the pack.

What the multiple did, and what earnings did

The de-rating is almost entirely a change in the multiple, not the earnings. Reported diluted EPS rose from C$6.86 in FY2023 to C$7.35 in FY2025, and adjusted diluted EPS from C$7.07 to C$8.30 [1]. The most recent quarter continued the pattern: in Q2 FY2026, revenue grew 3.3% (1.6% in constant currency) yet diluted EPS climbed 10.6% to C$2.09, carried by margins and buybacks rather than volume [2]. Over the same window the share price nearly halved its valuation. The earnings engine slowed but did not stall; the price did the damage.

Reported and adjusted diluted EPS, FY2023–FY2025, per the FY2025 Annual Report [3]. Consensus pencils in C$8.90 for FY2026 and C$9.69 for FY2027, on an adjusted-type basis.

The earnings trajectory runs against a falling valuation. At C$94.85, CGI trades at 12.4 times trailing earnings and about 10 times forward — 10.7 times the C$8.90 the Street pencils in for FY2026 and 9.8 times the C$9.69 for FY2027 — against a five-year average price/earnings ratio near 20. Earnings-per-share have risen every year of that span; the multiple is what moved.

Market data as of July 10, 2026; FCF yield derived from FY2025 free cash flow of ~C$2.1 billion against market capitalization of ~C$19.9 billion [4].

The price slide was a sector event

The fall was not gradual disappointment with CGI. It tracked a repricing of the whole labor-based IT-services complex through 2026, as the market began to doubt whether firms that sell people-hours can hold revenue and margin against generative AI. Accenture cut its outlook and its shares fell to the mid-US$130s, less than half their 2024 peak; Capgemini dropped sharply on the same fear; Infosys reached a five-year low and Tata Consultancy Services a multi-year low. CGI's chart is a member of that cohort, not an outlier within it.

Market data, Toronto Stock Exchange closing prices, January–July 2026.

That context changes how the valuation should be read. CGI did not de-rate because the market singled it out; it de-rated because the market marked down the business model it shares with its peers. Whether that mark-down is an opportunity depends on how CGI is priced relative to that peer group — and there, the discount narrative breaks down.

Not the cheap one in the room

On forward earnings, CGI is the most expensive of the three Western labor-based peers it most resembles. It trades at 10.1 times forward earnings against Accenture's 9.4, Capgemini's 6.8 and Cognizant's roughly 9.1; on EV/EBITDA the gap is wider, 7.7 times versus 6.3 for both Accenture and Cognizant. CGI screens cheap only against IBM, which has re-rated toward a software-and-AI story near 22 times, and against the Indian majors — Infosys near 14 times, TCS near 13 — which carry a structural growth-and-return-of-capital premium.

Forward P/E from market data as of July 10, 2026. Peer set is CGI's closest labor-based IT-services competitors — Accenture, Capgemini, Cognizant, Infosys, TCS and IBM.

Market data as of July 10, 2026; blanks where a clean current figure was not available. Peer group is the analyst's labor-based IT-services comparison set.

The premium to Accenture, Capgemini and Cognizant is small, and there is a defensible case for it. CGI runs a higher share of recurring managed services — roughly 55% of revenue — and books that work at 117–122% of revenue, a mix the market appears to treat as more defensible against AI than discretionary consulting (Order Book). Its adjusted EBIT margin held at 16.4% in FY2025, and it converts well over 100% of earnings to free cash [5]. What the premium is not is a margin of safety relative to the peer group. An investor buying CGI here is paying for quality and durability at a small markup to cheaper, faster-shrinking peers — not buying the sector's discount name.

What ten times earnings is paying for

Reduced to what it implies, the multiple is undemanding. At C$94.85 on FY2026 consensus of C$8.90, the forward earnings yield is about 9.4%, and free-cash-flow yield sits near 11% on FY2025 output of roughly C$2.1 billion. Consensus has EPS reaching C$9.69 in FY2027 — high-single-digit growth. A high-single-digit compounder at roughly a 10% earnings yield is not demanding; the price embeds low expectations for growth and a real fear that AI erodes the labor model.

Two facts complicate the bull reading. First, the earnings quality has softened where it matters to a valuation: return on invested capital fell to 13.6% in FY2025 from 16.0% in each of the two prior years, as acquisitions were digested [6]. A lower return on capital deserves a lower multiple, all else equal. Second, capital allocation has not been vindicated by the tape: during FY2025 CGI repurchased C$1,258.5 million of stock at a weighted-average price of C$142.01 — about 50% above today's price — while paying a dividend that yields just 0.7% [7]. The same buyback program, run at C$95, is far more accretive than it was at C$142; the balance sheet, at net debt near C$3.5 billion, has the room [8].

What would change the read

The evidence supports a measured view: CGI is reasonably valued rather than obviously cheap. The de-rating restored a sensible price for a high-quality, slower-growing compounder, but it did not open a wide discount to comparable businesses. The strongest fact against a constructive read is the return-on-capital slippage to 13.6% paired with constant-currency growth of only 1.6% in the most recent quarter — a business that is both growing more slowly and earning less on incremental capital than it was two years ago [9][10].

Three things would decide which way the multiple travels from here. Constant-currency organic growth is the first: a durable move back toward mid-single digits would argue the AI fear is overdone and support a re-rating; a slide toward flat would validate the discount. ROIC is the second: a recovery toward 16% as the FY2025 acquisitions season would confirm the deals earned their cost of capital, while a further drift would mark the buy half of Build-and-Buy as multiple-dilutive. Capital allocation is the third: sustained repurchases at today's price, rather than at C$142, are the clearest signal management sees the shares as undervalued — and the most direct route to per-share compounding while the multiple stays low [11].