Forrester Could Double

I've never been good at small talk so I'll just right for it: I think Forrester Research (FORR) is a steal at around $35 per share and could double in a year from here. I loaded up on the stock in my personal account last week and will likely add more this week. If you browse my previous articles, you'll notice that I've been a contributor since 2013 and have written 109 articles covering a wide range of topics, but this is the first time that I am publicly saying that I've found a stock that I think can double and I've put my money where my mouth is. As always, this isn't a recommendation or solicitation -- I only write to help educate the public and because I enjoy it.

The Fat Pitch

As a professional stock picker, the hardest thing is waiting for the fat pitch. I don't know many Wall Street types who will admit this, but I will (and it doesn't take much courage because I'm anonymous): most of the time I have no idea what is going on. When I sit across a CEO or with a group of sharp buy-siders, 90% of the time I feel stupid because I don't understand the situation or have no opinion. When I do know what's going on, I feel a great sense of relief: finally, a fat pitch I can hit!

Now, for those not in the know, Warren Buffett popularized the idea of waiting for a fat pitch, which you can read about here. The basic idea is that an investor should wait for the type of pitch that they feel highly confident that they could hit. For years and years, I've invested my personal money into index funds patiently waiting for a fat pitch. When I came across FORR, I know it is time to take a swing for a few simple reasons: the stock is priced as if the company is in crisis when the issue is more like a tempest in a teapot. As we move through 2020, the issue should be fixed and I believe the stock could double over the next year.

Valuation: $70 Price

Below, I've attached a chart from FactSet showing FORR's forward twelve month P/E over the past 15 years. At 18.7x, the stock is trading near its 15-year lows, similar to where it traded during the height of the financial crisis.

In 2010, in the wake of the financial crisis, FORR's EPS declined 16%. Yet, consensus estimates for 2020 is forecasting a 23% increase in EPS to $1.94, which follows an estimated 16% increase in 2019. Clearly, the market is freaked out about something -- call it the bogeyman. If this bogeyman goes away, the stock could hit $70 per share existing 2020, or a double from current levels, by 1) rerating back to 30x forward EPS and 2) assuming EPS grow 20% in 2021 to $2.33 per share.

There is a bogeyman behind all mis-priced securities. Sometimes it is real, sometimes it is just a figment of the imagination.

Stock Review

The chart attached below from FactSet shows FORR's stock price (top) and short interest as a % of float (bottom) over the past 15 years.

Looking at the chart above, there are a few observations I'd like to share. First, the stock fell about 1/3 since the end of July, 2019. Second, this pullback is the fifth significant decline over the past 15 years -- nothing new here. Third, the stock can be volatile, and it has traded between an upward channel over the past 15 years. Fourth, the stock appears to be at the low side of the upward channel. Unless the fundamentals have deteriorated significantly -- which I believe have not -- FORR looks like it is poised for a rebound. Fifth, the short interest is low and have been declining, which suggests to me that there are no compelling short thesis out there. I don't like going up against professional short sellers unless I am confident they are wrong -- but I have not come across any short thesis on FORR.

The Bogeyman

Looking at FORR's chart, the obvious question is, "what the heck happened on July 31 that caused the stock to drop so much?". That day, FORR reported Q2 earnings and took down their 2019 EPS guidance from the range of $1.55 - $1.67 to $1.52 - $1.62, or down 2.5% at the midpoint. That hardly justifies a 1/3 drop, but before I get into an analysis of the Q3 quarter, I want to take a step back to look at Gartner's (IT).

Gartner is important because it is FORR's biggest competitor, the only public company with a business model that is almost identical to FORR's, and Gartner also gets much more investor attention due to its size. Hence, analysts and algos tend to price FORR by referencing Gartner's multiples, justified or not. Unfortunately for FORR, Gartner reported bad earnings a day before FORR, crushing both stocks. Gartner's PE multiple went from ~40x before earnings to ~33x in two weeks. As you can see from the 1-year FactSet chart on Gartner's PE multiples below, Gartner has since rerated back to ~40x, and FORR is only beginning to rerate back to multiples prior to Q2.

With Gartner's poor Q2 results in mind, let's turn back to FORR's 2019 EPS guide down. The modest 2.5% EPS guide down was driven by FORR's decision to accelerate the integration of a large acquisition, SiriusDecisions, which has been experiencing elevated sales force turnover.

Long time followers of FORR understand that FORR has struggled for many years with its go-to-market strategy and sales organization before promoting Kelly Hippler to the position Chief Sales Officer in July 2017. Although FORR's legacy business continues to perform well, any signs of sales issues likely triggered a neural network of pain in market participants. This painful recollection and Gartner's violent sell off likely created an illusion that FORR has deep fundamental issues. In the next section, I will explain why FORR's business is doing just fine.

Tempest In A Teapot, The Oceans Are Calm

Investors had a terrible experience with FORR's struggling go-to-market strategy and sales execution from around 2013 through 2017. However, since FORR put Kelly Hippler in charge of sales in July 2017, underlying metrics have dramatically improved.

2018 sales growth accelerated to +5.9% from +3.6% in 2017. Q3 2019 organic revenue grow +9% y/y, and 2019 organic growth looks like it will accelerate again compared to 2018. When Kelly took over, FORR experienced two quarters of negative -2% y/y agreement value in Q1 and Q2 of 2017. Remarkably, agreement value growth accelerated every quarter since Q2 of 2017 through Q2 2019, hitting a high of +13%. Q3 2019 remains robust at +12% y/y. Q3 2019 also saw meaningful improvement in other important metrics like client retention, which improved 2 points above Q3 of 2018.

Clearly, the core business under new sales leadership has been doing great, so all the worry surrounds the performance of SiriusDecisions.

Before I dive deeper into SiriusDecision's problems, let's first put things in perspective: FORR acquired SiriusDecisions for $245M in January 2019. Since worries around SiriusDecisions began after FORR's Q2 2019 earnings call, FORR's stock went from ~ $50 to $35, wiping out $280M in market value. Essentially, the market's knee jerk reaction to sales issues at SiriusDecisions has wiped out the entire value of SiriusDecisions plus $35M more for good measure.

So, what happened at SiriusDecisions? During the Q2 earnings call, management noted the following about SiriusDecisions:

We've had an opportunity to assess where we are with the SiriusDecisions sales channel and have decided to integrate their sales function faster than originally planned. We believe it is the right move to make to maximize the long-term success of our investment in SiriusDecisions...

By integrating sales now, it allows us to be better positioned to start 2020 with a unified approach to customers. We believe the decision to integrate SiriusDecisions sales in Q2 will have an impact on our 2019 results. As a result, we have reduced guidance modestly 1% to 2% for both revenue and earnings per share to reflect the impact of this change and the impact of FX headwinds on our revenue...

We're going to bring them together structurally to get ready essentially for cross-selling in 2020. So, we wanted to do it earlier rather than later.

Later in the same call, management disclosed that sales force attrition at SiriusDecisions hit 27% as they integrated the business, which is the same level that FORR experienced when they transitioned to their new sales model under Kelly's leadership. Management noted that attrition has improved as they exited Q2, but anytime you have attrition in sales, it will negatively impact sales and earnings.

Management sounded positive on the SiriusDecision integration in the Q3 call:

What excites me I think as we get into 2020 is that we've got to Kelley's point a core group of the SD reps who are performing well that I think are excited to be a part of something much larger and the Forrester, legacy Forrester reps where we've had lower than normal attrition this year who we're very excited about selling a fully integrated product.'

Moreover, management guided 2020 EPS growth to accelerate compared to 2019, with expanding margins:

We look for margins to expand at 100 basis points to 200... I'm saying it'll be a faster rate. So, it's not going to be 12% to 16% next year, it will be something larger than that in terms of EPS growth. And again, it's driven in part by – it's primarily driven by the full integration of SiriusDecisions. So, you're adding revenue synergies, you're adding some cost synergies and that should drive very healthy earnings per share growth year-over-year. So, it's going to be better than the growth we are experiencing this year. basis points as we roll into 2020.

Conclusion

As demonstrated above, I believe the market already completely wrote off the value of SiriusDecision when the issue seems both limited and fixable. I believe FORR clearly demonstrated that they have the right sales leadership and strategy in place and that they will successfully integration SiriusDecision. If FORR delivers on 2020 estimates and the market agrees with my 2021 estimates discussed above, the stock should re-rate to 30x 2021 EPS and trade to $70 per share, or a double from current levels.

Disclosure:

I am/we are long FORR.I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.