UPDATE 3-CGI Group shares drop after Chanos makes big short bet

Wed Dec 4, 2013 5:33pm EST
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(Adds CGI Group's response to Chanos)

By Jennifer Ablan

Dec 4 (Reuters) - 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 HealthCare.gov website.

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 finding funds.   Continued...