Identifying Real Growth: Why That Makes Gartner Inc (IT) A Good Buy

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Growth has been out of fashion. In the notoriously fickle world of equity investing much of the first half of this year has been spent re-adjusting the price of stocks previously prized for growth potential. In some cases maybe things had got out of hand, but the trend has served to increase the value to be found in what I refer to as “real growth” stocks.

Real growth, to me, is growth that has been sustained over a period of time through thick and thin. Real growth stocks may have stumbled occasionally, but have then immediately resumed their upward path. Real growth is not about the hope that one day a company will make money. It is about a history of doing so, with consistently rising revenues and profits. That ability will be reflected in the stock price, but to identify a real growth stock it is often necessary to take a step back.

If you look at a 6 Month Chart for a real growth company the trend is sometimes hidden. Step back to, say, 5 Years however, and it becomes obvious. Gartner Inc. (IT) is a case in point.

Gartner Inc (IT)Gartner Inc (IT)

The 6 Month chart for IT above shows some volatility but little in the way of real direction. With a 5 Year view the direction becomes obvious.

Gartner Inc (IT)Gartner Inc (IT)

The thing is, in the case of Gartner, this is a reflection of actual results, not the result of excessive exuberance on the part of traders. Since 2003, Gartner has increased both revenue and EPS every year with the only exception, understandably, being 2009. Even when they reported a rare bottom line miss of expectations for Q4 2013 in February, the results still showed growth in both revenue and profit.

Gartner provides research and analysis on technology. They operate in three segments, Research, Consulting and Events. The fastest growth at the moment comes from research, which also happens to be Gartner’s most profitable division. They have a global presence with nearly half of their business outside the US and are ideally placed as market leader to profit from the increasingly complex world of tech.

At a forward P/E around 30, Gartner stock is not cheap. Even in the traditionally high multiple world of tech, thirty times forward earnings doesn’t represent any kind of a discount for a mature company. What it does offer, however, is that elusive “real growth.” The company can be expected to continue increasing revenue and profit in an expanding global market.

It is a business that depends on technological advances, but not internal ones. If there is innovation in the information technology world, then Gartner benefits, wherever it comes from. It is also a business with significant barriers to entry. While anybody can call themselves an IT consultant, the huge amount of historical data and experience that Gartner has will always give them an edge.

On Monday, it was announced that the long term CFO, Chris Lafond, was leaving the company, presumably in search of a CEO position elsewhere. It is a sign of the strength and depth of the management team that this news, which often unsettles investors, has been taken by the market in its stride. It is up around 4% since the news broke. The announced successor, Craig Safian, represents an internal promotion and the transition is expected to be uneventful.

Identifying real growth is one thing, but in order for a company with a history of growth to be a decent investment they also have to have a decent future. If the growth has come in an industry that is about to slow significantly then what happened in the past is irrelevant. That can hardly be said to be the case in the ever evolving world of technology, so the important thing is that Gartman have shown that, whatever changes come along, they can profit from them. That is what drives “real growth” and that is what makes IT a great long-term buy.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Earnings , Stocks

Referenced Stocks: IT

Martin Tillier


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