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Gamma Communications’ (LSE: GAMA) share worth is on a tear for the time being. Over the past yr, it’s risen about 50%. Numerous Metropolis analysts count on the British communications firm’s inventory to proceed rising nevertheless.
One main brokerage agency even thinks Gamma’s inventory might climb one other 48% from right here within the medium time period.
Lofty worth goal
The brokerage agency I’m referring to is Deutsche Financial institution and it presently has a worth goal of two,250p on Gamma shares.
That concentrate on – which is presently the very best inside the brokerage neighborhood – is about 48% greater than the share worth in the present day (1,520p, as I write this).
So if the inventory was to hit that concentrate on, a £1,000 funding in the present day would develop to round £1,480 (be aware that I’m ignoring buying and selling commissions and platform charges right here).
I’m bullish
Now, I personal Gamma shares in my portfolio. And I’m fairly bullish on them. This firm’s rising at a powerful charge as organisations rush to get their communications methods up to the mark for the digital age. This yr, for instance, income is forecast to rise practically 9%.
It’s additionally seeing its earnings rise sharply. At present, analysts count on earnings progress of seven.9% this yr and eight.8% subsequent yr.
I’m not satisfied that the expansion right here is totally mirrored within the firm’s valuation nevertheless. At current, the forward-looking price-to-earnings (P/E) ratio utilizing subsequent yr’s earnings per share (EPS) forecast of 88.1p is 17.3.
That strikes me as fairly low. Particularly contemplating that Gamma has just about no debt on its stability, constantly generates a excessive return on capital (five-year common of 23%), usually will increase its dividend, and does share buybacks (the group introduced a £35m buyback in March).
Given the extent of high quality right here, I feel this inventory deserves to be buying and selling on a P/E ratio of round 20-25. If the P/E ratio was to rise to 25, we’d be a share worth of round 2,200p (utilizing subsequent yr’s EPS forecast), which is fairly near Deutsche Financial institution’s goal of two,250p.
No ensures
Now after all, whereas Gamma shares are in a powerful uptrend in the present day, there’s no assure that they’ll hit 2,250p any time quickly.
If the corporate was to announce a slowdown in progress on account of weak financial circumstances in its upcoming half-year outcomes (these will likely be posted in early September), the shares might nosedive.
One other threat is a basic inventory market wobble. If volatility was to return to the markets, this firm – which remains to be comparatively small – might see its share worth fall.
Taking a long-term view nevertheless, I feel this under-the-radar progress inventory has loads of potential. For my part, it’s an amazing play on the continuing digital transformation theme.
