Gamma Communications’ (LSE: GAMA) share price is on a tear in the intervening time. Over the past yr, it’s risen about 50%. A whole lot of Metropolis analysts anticipate the British communications firm’s inventory to proceed rising nonetheless.

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

Lofty price goal

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

That concentrate on – which is at the moment the very best throughout the brokerage group – is about 48% greater than the share price at this time (1,520p, as I write this).

So if the inventory was to hit that focus on, a £1,000 funding at this time would develop to round £1,480 (be aware 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 formidable charge as organisations rush to get their communications methods up to hurry for the digital age. This yr, for instance, income is forecast to rise practically 9%.

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

I’m not satisfied that the expansion right here is totally mirrored within the firm’s valuation nonetheless. 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%), frequently 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 a share price 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 at this time, there’s no assure that they’ll hit 2,250p any time quickly.

If the corporate was to announce a slowdown in development because of weak financial circumstances in its upcoming half-year outcomes (these shall be posted in early September), the shares might nosedive.

One other threat is a basic inventory market wobble. If volatility was to return to the markets, this firm – which remains to be comparatively small – might see its share price fall.

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