This UK development inventory may flip £1,000 into £1,480 if analysts are proper

Gamma Communications’ (LSE: GAMA) share value is on a tear for the time being. Over the past yr, it’s risen about 50%. Numerous Metropolis analysts count on the British communications firm’s inventory to proceed rising nevertheless.

One main brokerage agency even thinks Gamma’s inventory may climb one other 48% from right here within the medium time period.

Lofty value goal

The brokerage agency I’m referring to is Deutsche Financial institution and it at present has a value goal of two,250p on Gamma shares.

That focus on – which is at present the very best inside the brokerage group – is about 48% greater than the share value as we speak (1,520p, as I write this).

So if the inventory was to hit that focus on, a £1,000 funding as we speak would develop to round £1,480 (observe that I’m ignoring buying and selling commissions and platform charges right here).

I’m bullish

Now, I personal Gamma shares in my portfolio. And I’m fairly bullish on them. This firm’s rising at a powerful charge as organisations rush to get their communications methods in control for the digital age. This yr, for instance, income is forecast to rise almost 9%.

It’s additionally seeing its earnings rise sharply. Presently, analysts count on earnings development of seven.9% this yr and eight.8% subsequent yr.

I’m not satisfied that the expansion right here is absolutely mirrored within the firm’s valuation nevertheless. At current, the forward-looking price-to-earnings (P/E) ratio utilizing subsequent yr’s earnings per share (EPS) forecast of 88.1p is 17.3.

That strikes me as fairly low. Particularly contemplating that Gamma has just about no debt on its steadiness, constantly generates a excessive return on capital (five-year common of 23%), recurrently will increase its dividend, and does share buybacks (the group introduced a £35m buyback in March).

Given the extent of high quality right here, I feel this inventory deserves to be buying and selling on a P/E ratio of round 20-25. If the P/E ratio was to rise to 25, we’d be taking a look at a share value of round 2,200p (utilizing subsequent yr’s EPS forecast), which is fairly near Deutsche Financial institution’s goal of two,250p.

No ensures

Now in fact, whereas Gamma shares are in a robust uptrend as we speak, there’s no assure that they’ll hit 2,250p any time quickly.

If the corporate was to announce a slowdown in development on account of weak financial situations in its upcoming half-year outcomes (these will probably be posted in early September), the shares may nosedive.

One other danger is a common inventory market wobble. If volatility was to return to the markets, this firm – which remains to be comparatively small – may see its share value fall.

Taking a long-term view nevertheless, I feel this under-the-radar development inventory has a variety of potential. For my part, it’s a fantastic play on the continuing digital transformation theme.