In my previous article on Gartner (NYSE:IT), I took a neutral stance on the company despite the excellent financial upside potential and active share buybacks:
The company operates in a large and highly fragmented market and has maintained a high growth rate for many years. Gartner belongs to a small club of companies that can increase revenue and improve efficiency at the same time. According to the results of the last reporting period, the ROE exceeded 100%. We expect the business to continue to grow and improve its profitability. Additionally, IT is actively creating value for investors through share buybacks. However, the company is trading close to fair market value. We are neutral on Gartner at the current price.
I also added:
Buying the correction was a great opportunity to beat the market. Due to the high standard deviation during the last correction, IT lost more than the market average. Historically, the stock has outperformed the index.
The latest report showed that our expectations were quite conservative, as the company exceeded expectations on all key financial indicators. Gartner is a two-engine company. Thanks to GTS and GBS, the company can generate double-digit, sustained and long-term growth. Additionally, the company may exceed management’s margin expectations because it does not consider offline conferencing more profitable. In February, the board of directors approved a new share buyback. We will likely see a negative equity balance over the next six months. Potentially, if the company reduces its asset balance by $1 billion and net income remains at a comparable level, the ROA will exceed 30%. According to my assessment, the company is trading at less than the fair price. I value stocks as a To buy.
At the end of 2021, the company exceeded Wall Street consensus, management expectations and my guidance on all key financial indicators. Revenue from the Research, Consulting and Conferences segments increased by 13.8%, 11.1% and 78.5% respectively. Total revenue increased 15.5% year-on-year to $4.734 million.
At the end of the year, the value of the contract had increased by 16%. Over the past ten years, this indicator has increased faster only once – in 2017. The acceleration of the CV indicates that demand remains very strong.
The Research segment accounts for approximately 87% of the company’s revenue. This segment serves executives and their teams through two sales channels: Global Technology Sales (GTS) and Global Business Sales (GBS). GTS is at the service of managers and their teams within IT. Through this channel, Gartner increased contract value by 14.1% for the full year. GBS serves its customers beyond IT. Through this channel, the company increased the value of the contract by 23.9%. Gartner is the only company to have benefited from global supply chain challenges, as it has been an additional driver of GBS’s growth.
In the previous article, I wrote that many analysts ignore GBS because it is small compared to GTS, but their potential is huge because GBS includes everything that is not included in IT: finance, blockchain sourcing, HR, sales, legal, marketing, etc. Craig Safian underlined the potential of GBS during the last call:
“And so if you want to think of the share in a way, it’s extremely small compared to GTS, but GTS, again, has huge untapped market potential in itself. So the track for each of the practices in GBS is huge and is comparable to what we have on the end user side of GTS.”
“And Mario, just to put it in kind of a quantitative perspective as well, just to add to that. When we look at our available market opportunities, we see a market of around $55 billion in the markets we sell to in GTS And we’ve got $3.2 billion, including $3.3 billion. On the GBS side, we see a nearly $145 billion market opportunity, and we have less than $1 billion..”
Previously, it was believed that GTS could generate double-digit growth in the value of long-term contracts. We now see that Gartner is a two-engine company. GBS will also allow the company to grow sustainably in the long term.
Gartner is a people-driven company; salaries represent a significant portion of all business expenses. However, Gartner increased its contribution margin by 2.3 percentage points to 69.5% despite the macroeconomic conditions. Adj. EBITDA margin increased by 7.2pp to 27.2%. Net profit margin increased by 6.0 percentage points to 16.8%. Management expects the company to become even more profitable in 2022:
“As highlighted in our 2022 guidance, we expect double-digit currency-neutral revenue growth and a 20% margin, even as we ramp up our hiring and restore costs to invest in the future.”
I expect margins to be slightly higher, as management guidelines assume that all corporate conferences in 2022 will be held online only. However, the offline event margin is higher due to additional revenue. The company has already held offline conferences in 2021 and will likely continue in 2022. The only factor limiting profitability could be further deterioration in macroeconomic conditions.
Gartner repurchased approximately $1.7 billion of shares in 2021, reducing its net number of shares by approximately 7%. Active redemptions are one of the factors of the company’s high profitability. By reducing the equity balance, the company generates an impressive return on equity of 214% for shareholders.
In February, the board of directors approved a new buyout. Gartner now has approximately $1 billion, or 4% of market capitalization and 13.5% of total company assets. We will likely see a negative equity balance over the next six months. Potentially, if the company reduces its asset balance by $1 billion and net income remains at a comparable level, the ROA will exceed 30%.
In the DCF model, I make several assumptions. First, I expect revenue to grow in line with Wall Street consensus through 2024, then slow to 5% in 2028. This is a fairly conservative forecast, as management is expects the company to be well positioned to drive long-term, sustained business. , double-digit growth. I’m waiting for the contribution margin, adj. EBITDA margin and FCF margin will remain at current levels through the end of the forecast period, although Gartner has continuously improved these metrics and is expected to continue improving them over time. Other relative indicators are predicted based on historical momentum and current trend. Additionally, I expect the company to continue to repurchase shares at the five-year average volume. The terminal growth rate is 3.5%. The assumptions are presented below:
With a stable growing cost of equity equal to 8.33%, the weighted average cost of capital [WACC] is 7.8%.
With a Terminal EV/EBITDA of 23x, our model projects a fair market value of $350 per share. The company is trading at a 19% discount to our estimate of fair value.
You can see the model here.
The last report showed that I had underestimated the company’s potential. Gartner can preserve long-term sustainable growth with GTS and GBS. There is also potential for profit growth through offline conferencing in the relevant segment. Additionally, the company is actively repurchasing shares and most likely will continue to do so. At the current price, Gartner is a good buying opportunity.