(Adds CGI Group's response to Chanos)
By Jennifer Ablan
Dec 4 Prominent short-seller Jim Chanos has
taken a major short position in shares of CGI Group Inc
, the parent of CGI Federal, which is the main
contractor behind the U.S. government's glitch-plagued
CGI Group's U.S.-listed stock dropped as much as 5.9 percent
after Newsweek first reported early Wednesday that Chanos counts
the stock among his "largest short positions." CGI shares closed
down 4.2 percent at $34.66 on the New York Stock Exchange,
though the stock is still up more than 50 percent this year.
Chanos, in a 10-page memo sent recently to clients, a copy
of which was obtained by Reuters, outlines why he believes CGI's
corporate performance and stock price warrant scrutiny.
Chanos cited the "PR mess with the rollout of the Affordable
Care Act Exchanges, which could reduce the likelihood of future
government contracts" and said that "growing through
acquisitions hides deteriorating fundamentals" at CGI.
HealthCare.gov is the website designed to let Americans sign
up for health insurance under the exchanges created by the
Affordable Care Act, popularly known as Obamacare.
Chanos's memo also pointed to CGI's deteriorating cash flow
and falling bookings of new business and said CGI has used
various "accounting conventions" that have improved its
earnings, in part by recognizing revenue already counted by
Logica Plc, a big technology company that CGI bought last year.
Chanos also cited CGI's exposure to U.S. federal government
spending, which is approximately 14 percent of the company's
total revenue, noting that the second round of sequester is
coming in January. While the sequestered amount will drop from
$986 billion to $967 billion, it is expected to squeeze agencies
even more as they will have run out of creative methods of
Chanos, the founder of hedge fund Kynikos Associates, was
not available for comment. Kynikos has around $6 billion in
assets under management.
Lorne Gorber, global spokesman for CGI, said he has not read
the report from Chanos and has been in touch with the firm
asking for a copy of it. "I'm still trying to get my hands on
the referenced 10-page memo," he said.
"I can assure you we've never had a conversation with him,
though I invited him to call me when I sent him a note to ask
for his report."
Gorber defended CGI's performance. "Fundamentally, our
results are there and I think investors should analyze them for
what they are and do their due diligence the same way that we
would if we were buying a company," he said.
"Ourselves, we just bought $100 million worth of stock last
week," he added.
As of Tuesday, about 50.8 million shares traded of CGI's
277.47 million outstanding shares - 18.3 percent of the float -
were being shorted, according to data firm Markit.
CGI Group has been an investor favorite for nearly five
years, helped by its acquisition of European rival Logica. But
headlines on troubles at the federal health insurance website, a
key component of President Barack Obama's healthcare reform, are
drawing growing attention to the company, often called Canada's
most valuable technology firm.
"Media attention on CGI's role in the 'Obamacare' healthcare
exchange website has been negative," Paul Treiber, analyst at
RBC Capital Markets, wrote in a reaction to the Chanos news.
"However, CEO Mike Roach on CGI's Q4/F13 call in November
indicated CGI's pipeline is continuing to expand and it is
receiving support from clients, which to us indicates that the
reputational impact to CGI's business may be limited."
RBC has an "outperform" recommendation on CGI shares.
(Additional reporting by Leah Schnurr in Toronota; Editing by
Jan Paschal and Leslie Adler)