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Gamma CommunicationsThe GAMA (LSE) share price is on the rise at the moment. Over the past year, it has risen by around 50%. However, many City analysts expect the British communications company's shares to continue to rise.
One major brokerage firm even believes Gamma shares could rise another 48% from now in the medium term.
High price target
The brokerage firm I am referring to is German Bank and currently has a 2,250p target price on Gamma shares.
That target, which is currently the highest within the brokerage community, is approximately 48% more than the share price today (1,520p, as I write this).
So if the shares were to hit that target, a £1000 investment today would grow to around £1480 (note that I am ignoring trading commissions and platform fees here).
I am an optimist
I currently have Gamma stock in my portfolio and am quite bullish on it. This company is growing at an impressive rate as organizations rush to get their communications systems ready for the digital age. This year, for example, revenue is forecast to rise by almost 9%.
It is also seeing a marked rise in earnings. Analysts are currently expecting earnings growth of 7.9% this year and 8.8% next year.
However, I am not convinced that the growth here is fully reflected in the company's valuation. Currently, the forward-looking price-to-earnings (P/E) ratio using next year's earnings per share (EPS) forecast of 88.1p is 17.3.
That seems like a pretty low figure to me, especially considering that Gamma has virtually no debt on its balance sheet, consistently generates high returns on equity (a five-year average of 23%), regularly increases its dividend and engages in share buybacks (the group announced a £35m buyback in March).
Given the quality of the company, I think this stock deserves to trade at a P/E ratio of around 20-25. If the P/E ratio were to rise to 25, we would be looking at a share price of around 2200p (based on next year's EPS forecast), which is pretty close to Deutsche Bank's target of 2250p.
No guarantees
Now of course, while Gamma shares are in a strong uptrend today, there is no guarantee that they will hit 2250p any time soon.
If the company were to announce a slowdown in growth as a result of weak economic conditions in its next half-year results (due in early September), the shares could plummet.
Another risk is that of widespread volatility on the stock markets. If volatility were to return to the markets, this company, which is still relatively small, could see its share price fall.
However, if we look at the long term, I think this little-known growth stock has a lot of potential. In my opinion, it is a great bet on the ongoing digital transformation theme.
