IT Stock Study (2-14-23)

I recently* did a stock study on Gartner Inc. (IT) with a closing price of $351.46.

CFRA writes:

     > Gartner, Inc. (IT) is one of the world’s largest research and
     > advisory providers. [Gartner] supplies business leaders with
     > indispensable insights, advice, and tools to achieve their goals and
     > help facilitate business outcomes. [Gartner] currently services
     > more than 15,000 organizations in over 100 countries worldwide.

This medium-sized company has grown sales and earnings at annualized rates of 13.6% and 20.7% over the last 10 years, respectively. Lines are mostly up, straight, and parallel except for EPS in ’17-’18 (likely due to TCJA) and sales in ’20. Over the last 10 years (excluding ’17), PTPM has ranged from 4.6% (’18) to 20.5% (’21) with a last-5-year average of 11.7%. This leads peer averages and is roughly even with industry averages. Gartner has demonstrated some wild ROE swings ranging from -1819% (’16) to 226.9% (’21) with a last-5-year average (excluding ’21 and -1215% for ’22) of 21%.

Over the last five years, Debt-to-Capital averages an uncomfortable 78.1%, which is higher than peer and industry averages. Interest Coverage is 8, but was less than 4 from ’18-’20. Current and Quick Ratios don’t alleviate much concern at 0.64 and 0.51, respectively. Value Line gives Gartner a B++ for Financial Strength “despite its sizeable debt load.” Rather than pay down debt, the company bought back $1B in stock in ’22, which is about equal to its TTM FCF.

I assume long-term annualized sales growth of 7% based on the following:

• CNN Business projects 7.3% YOY and 8.7% per year for ’23 and ’22-’24, respectively (based on 8 analysts).
• YF projects YOY 8.3% and 10.3% for ’23 and ’24, respectively (9 analysts).
• Zacks projects YOY 8.7% and 10.6% for ’23 and ’24, respectively (3).
• Value Line projects 10% per year from ’22-’27.
• CFRA projects 7.5% YOY and 8.7% per year for ’23 and ’22-’24, respectively.

I am forecasting on the low side.

I assume long-term annualized EPS growth of 6% based on the following:

• CNN Business projects 16.3% YOY contraction and 1.5% contraction per year for ’23 and ’22-’24, respectively (based on eight analysts), along with a 5-year annualized growth rate of 6.2%.
• MarketWatch projects 4.5% and 8.2% growth per year for ’22-’24 and ’22-’25, respectively (10 analysts).
• Nasdaq.com projects 18.2% YOY growth and 17.3% growth per year for ’24 and ’23-’25, respectively (4, 4, and 2 analysts for ’23, ’24, and ’25).
• Seeking Alpha projects 4-year annualized growth of 13.4%.
• YF projects 16.3% YOY contraction and 16% YOY growth for ’23 and ’24, respectively (9), along with 5-year annualized growth of 6%.
• Zacks projects 15.8% YOY contraction and 18.2% YOY growth for ’23 and ’24, respectively (4), along with 5-year annualized growth of 6.5%.
• Value Line projects annualized growth of 10.5% from ’22-’27.
• CFRA projects contraction of 19.4% YOY and 4.6% per year for ’23 and ’22-’24, respectively, in addition to 5% annualized growth from ’21-’24.

I am forecasting at the bottom of the five-long-term-estimate range (mean 8.5%).

My Forecast High P/E is 35. Excluding ’17-’18, which were outliers over 100, high P/E went from 37 (’13) to 67.1 (’19) and has now come down to 35.9 (’22). The last-5-year average (excluding ’18) is 45.7. I am forecasting just below the range.

My Forecast Low P/E is 23. Excluding ’17-’18, which were outliers over 80, low P/E went from 24.1 (’13) to 47.9 (’19) and has now come down to 22.2 (’22). The last-5-year average (excluding ’18) is 28.1. I am forecasting at the bottom of the range.

My Low Stock Price Forecast (LSPF) is the default value of $229.80. This is 34.6% below the previous closing price and 3.8% above the 52-week low.

All this computes to an U/D ratio of 1.0, which makes IT a HOLD. The Total Annualized Return is 5.5%.

M* categorizes Gartner with a Wide economic moat (despite offering only quantitative analyst coverage).

PAR (using Forecast Average, not High, P/E) is 2%, though, which is much lower than desired for a medium-sized company. This is not a huge surprise as the stock is up almost 38% in the last 4.5 months.

To better understand margin of safety (MOS) in this study, I look to Member Sentiment (MS). Out of only 13 studies over the past 90 days (my own excluded), projected sales growth, projected EPS growth, and Forecast High P/E average 10.6%, 10.7%, and 45.6, respectively. My inputs are all lower. MS is quirky on Forecast Low P/E as three studies have values over 280. Excluding these, the average (10 studies) is 28.6, which is higher than mine. Value Line projects an average annual P/E of 30.5, which is higher than MS (37.1) and slightly higher than mine (29). All this is indicative of a healthy MOS.

What is not lower is my LSPF. MS has this 21% lower at $182. The ’21 low stock price was $149. In this regard, I don’t find MS to be unreasonable. It does imply a Forecast Low P/E of 18.2, however. As my P/E range is somewhat depressed already, I see no need to lower it further.

Somewhere and sometime, I think there’s a discussion to be had with regard to LSPF.

For any growth stock looking five years out, I never actually anticipate a future 52-week low (i.e. LSPF) to be lower than the current stock price. If I do, then I’m really predicting something horrible to happen to the company (e.g. losing its growth entirely), a stock market crash like we have never seen, a prolonged recession not seen in this country since the 1930’s (?), or some other Black Swan that I can’t imagine.

Consider a hypothetical range for LSPF from 20% below the last close to 30% [or more] below. Something seems contradictory about the fact that this can dramatically affect BUY vs. HOLD decisions today even though I fully expect stock price in five years to comfortably exceed the entire hypothetical range.

I’d love to hear some more experienced members weigh in on this.

*—Publishing in arrears as I’ve been doing one daily stock study while posting only two blogs per week.