Stock pick: Gartner Inc. (IT) stands to grow as more companies need tech advice

Not cheap, but plenty of growth potential

Chart showing trailing 12-month stock performance of Gartner Inc.

Anyone who reads the newspaper business pages will likely have come across experts from Gartner Inc. (NYSE: IT), the Stamford, Conn.-based technology research and advisory firm. While their work is well respected, so is their stock, which is up 26% over the last 12 months.

A majority of analysts have a buy rating on the stock, according to S&P Capital IQ, and a big reason for that is that the technology landscape is becoming that much more complex for business. As more operations utilize big data, cloud computing, social media and mobile, the more companies will look to Gartner for advice.

On March 30, Jerry Herman, an analyst with Stifel, upgraded his 12-month price target on the stock from $70 to $76. He points out that the market for technology research and consulting is large, but underutilized. It’s a $47 billion industry and Gartner is the leader in this space, he wrote in a report.

Technology consulting is also a global need and the company has done a good job of diversifying its client base, he writes. About 46% of its revenues come from outside the U.S. He adds that IT budgets are also far larger than what it costs to use Gartner’s services, which bodes well for the business.

Andre Benjamin, an analyst with Goldman Sachs, says revenue growth will depend on how it increases its sales force. The more people selling its services, the more money it makes, he wrote in a February 13 report. It did expand its sales team between 15% and 20% in Q3 and Q4 and he expects it to continue adding people in 2014.

He also thinks the company will buy back shares in the second half of this year and with free cash flow averaging about 1.6 times net income, it could buy other businesses too.

The stock isn’t cheap—it’s trading at 17 times 2014’s enterprise value-to-EBITDA, but it does have a good growth profile. Normalized earnings per share could grow by 54% between 2013 and 2016, according to S&P Capital IQ’s consensus estimates.

Gartner is currently trading at $69 a share, but Benjamin thinks it can hit $78 over the next 12 months. Other analysts have it reaching as high as $86 a share.