Gartner (IT) is a United States-based research and consulting firm. The company runs various research, consulting, and event management services for highly-skilled professionals and, in many instances, executives. I’m bullish on the stock. (See Analysts’ Top Stocks on TipRanks)
Why It’s a Stagflation Pick
U.S. Inflation continues to rise, but the dynamics have changed. Initially, inflation had risen due to an influx of stimulus capital, which triggered a spending spree. Since mid-year, the landscape changed when disposable income started tapering off, but inflation has continued to hover above the 5.3-5.4% levels.
The reason inflation has remained elevated is due to a push effect. Push inflation is caused by rising input costs in line items such as wages and inventories.
Push inflation usually occurs due to supply issues, which I’m sure all the readers have heard of on a recurrent basis; the danger of it is that there’s an inflection point where prices continue to rise while economic growth slows, and this causes a stagflationary scenario.
During periods of stagflation, companies such as Gartner, who’re running an intellectual property-based service with relatively constant input prices, will be least affected. Another plus for Gartner is that its target market is niche and the firm doesn’t rely on the broader economy as much as most businesses.
Gartner has been running on gross profits of around the 60% mark over the past 10-years and at an average operating income north of 10% over the same period. Illustrating the consistency of the company’s input costs, as inflation has pushed higher the past year, Gartner’s trailing twelve months gross profit and operating income have increased by 14.52% and 97.93%, respectively.
Creating Value Through Smart Acquisitions
A key part of Gartner’s value creation strategy is to acquire early-stage firms on both a vertical and horizontal basis. It’s acquired other research companies in recent years such as CEB World (2017), SCM World (2016), Machina Research (2016), and Software Advice (2014).
Growing through acquisitions is a much better tactic than starting internal segments from scratch if your goal is to increase your market share. The companies Gartner has snapped up also provide a “sum of the parts” effect, where research companies with different data and service solutions add to the company’s holistic service delivery and cost-saving synergies.
Valuation
To many, Gartner’s stock may seem overvalued, with a P/E ratio of 42.17; however, you have to look at the ratio out of isolation. The PEG ratio, which measures the P/E relative to the growth rate of the company’s earnings, is helpful to add to the analysis. Gartner’s PEG (0.17) is still trading below 1.00, the generally accepted over/undervalued threshold.
Gartner’s price-to-cash-flow ratio is also trading below its 5-year average by 24.2%, and its levered free cash flow has grown by 96.1% year-over-year, leading me to conclude that there’s value in abundance to investors.
Wall Street’s Take
According to Wall Street analysts, the stock remains a Moderate Buy, based on two Buys and three hold ratings issued in the past three months. The average Gartner price target of $361.60 implies 7.5% upside potential.
The latest analyst who’s provided coverage on the stock is Manav Patnaik of Barclays (BCS); Patnaik thinks Gartner is a hold and placed a $350 price target on the stock.
Concluding Thoughts
Gartner stock is an excellent pick during a period of potential stagflation due to its low elasticity in input costs. Furthermore, the company has added value through various acquisitions, and the stock remains undervalued according to its key metrics.
Disclosure: At the time of publication, Steve Gray Booyens did not have a position in any of the securities mentioned in this article.
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