Gartner: Consulting Is Adding to Growth and Driving Upside This Year

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There were no significant surprises on Gartner’s conference call Tuesday morning, but we remain encouraged by the company’s second-quarter results. While the company has delivered strong earnings growth during the last few years, investors have frequently wrestled with choppy results in the consulting business, concerns about weakening salesforce productivity, and an underleveraged balance sheet. Similar to the first quarter, second-quarter results showed that those trends have somewhat reversed this year.

In contrast to the last few years, the consulting business is performing better than expected and adding some upside. Salesforce growth still grew faster than contract value (CV) growth, but CV growth maintained its stepped-up constant-currency growth rate from the first quarter. Lastly, management continued to deploy a significant amount of capital through share repurchases after greatly stepping up the pace in the first quarter and completing the Software Advice acquisition.

These trends reinforce our confidence in the company’s ability to sustain midteens-orbetter earnings growth during the next few years. Management maintained its revenue and margin guidance, but increased its adjusted EPS guidance range by $0.03, driven by lower equity compensation and share count expectations, partially offset by increased expenses related to acquisitions. Thus, we are raising our adjusted EPS estimates for 2014 by $0.03, to $2.27, and 2015 by $0.03, to $2.73. We believe that there is some conservatism in these projections, particularly regarding its consulting segment.

Shares of Gartner trade at about 26 times our next-12-months’ EPS estimate (excluding stock comp), which compares with the company’s long-term P/E range of 20 to 25 times and a peer group average of about 21-22 times. Shares also trade at a 2014 free cash flow yield of 4.8%. We would be more aggressive on purchasing the stock at a slightly lower valuation, but we believe that Gartner generally remains well positioned to sustain double-digit revenue and earnings growth during the next few years. Our rating thus remains Outperform.

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