Share Repurchases And Service Expansion Set To Boost Future Earnings Growth

Key Takeaways

• Gartner's strategic share repurchases and solid CV growth among leaders indicate a strong position for future EPS and revenue growth.
  
• Expansion in consulting services and operational efficiencies through sales territory optimization hint at broader service offerings and targeted strategies for revenue and margin growth.
  
• Gartner's revenue growth is at risk from macroeconomic uncertainty, increasing costs, and fluctuating foreign exchange rates impacting global operations.

Catalysts

Operates as a research and advisory company in the United States, Canada, Europe, the Middle East, Africa, and internationally.

• Gartner's ongoing commitment to returning capital to shareholders through share repurchases is positioned to enhance future earning per share (EPS) growth by reducing share count over time.
  
• The company's solid growth in contract value (CV) among enterprise function leaders, which grew by 10%, indicates sustained demand for Gartner’s services, likely contributing to future revenue growth.
  
• Expansion in Gartner's consulting services, with consulting revenue growing by 15%, signals a broader service offering that can drive future revenue and margin growth.
  
• Gartner's significant investment in sales territories optimization and focused headcount growth suggests operational efficiencies and targeted growth strategies that are expected to positively impact future sales productivity and revenue growth.
  
• The company's strong free cash flow generation, significantly exceeding net income, supports strategic investments and share repurchases, enhancing its financial flexibility and future EPS growth.

Assumptions

• Analysts are assuming Gartner's revenue will grow by 8.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.7% today to 14.4% in 3 years time.
• Analysts expect earnings to reach $1.1 billion (and earnings per share of $14.61) by about August 2027, up from $828.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 40.6x on those 2027 earnings, down from 45.1x today. This future PE is greater than the current PE for the US IT industry at 35.3x.
• Analysts expect the number of shares outstanding to decline by 2.24% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.14%, as per the Simply Wall St company report.

Risks

• The volatile and uncertain macroeconomic and geopolitical environment could lead to inconsistent or reduced spending by Gartner's clients, potentially impacting revenue growth.
  
• Reliance on the contract value growth from the enterprise function leaders, which if it fails to meet expectations, could impact future revenue projections.
  
• The technology vendor segment's recovery, particularly small technology companies facing funding challenges, is uncertain and may not return to growth as expected, impacting overall contract value and revenue.
  
• Higher compensation costs driving increases in both cost of services and Selling, General & Administrative (SG&A) expenses could pressure net margins if revenue growth does not outpace expense growth.
  
• The potential impact of fluctuating foreign exchange rates on both revenue and profit margins, given Gartner's global operations, could lead to volatility in financial results.

Valuation

• The analysts have a consensus price target of $513.02 for Gartner based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $580.0, and the most bearish reporting a price target of just $421.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $7.7 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 40.6x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of $485.0, the analyst's price target of $513.02 is 5.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.