This UK growth stock could turn £1,000 into £1,480 if analysts are right

Gamma Communications' (LSE: GAMA) share price is currently declining. Last year, it increased by almost 50%. Most City analysts expect the British telecommunications company's stock to continue to rise, however.

One major brokerage even thinks Gamma's stock could rise another 48% from here in the medium term.

A higher price target

The sales company I am referring to Deutsche Bank and currently has a target price of 2,250p on Gamma shares.

That target – currently the highest among the buying community – is about 48% above today's price (1,520p, as I write this).

So if the stock were to reach that target, a £1,000 investment today would grow to around £1,480 (note that I'm ignoring trading commissions and platform fees here).

I have strength

Now, I hold Gamma shares in my portfolio. And I love them so much. The company is growing at an alarming rate as organizations rush to adapt their communication systems to the digital age. This year, for example, revenue is forecast to rise by around 9%.

It also sees its income increase significantly. Currently, analysts expect earnings growth of 7.9% this year and 8.8% next year.

I'm not sure the growth here is fully reflected in the company's calculations though. Currently, the forward price-to-earnings (P/E) ratio using next year's earnings per share (EPS) forecast of 88.1p is 17.3.

That makes me down. Especially considering that Gamma has no debt on its balance sheet, has always made a high return on capital (5-year average of 23%), often raises its dividends, and shares buybacks (the group announced a £35m cash-back in March) .

Given the level of quality here, 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 2,200p (using next year's EPS forecast), which is very close to Deutsche Bank's target of 2,250p.

There are no guarantees

Now of course, while Gamma shares have risen sharply today, there is no guarantee they will hit 2,250p anytime soon.

If the company were to announce a slowdown in growth due to weak economic conditions in its upcoming half-year results (these will be posted in early September), the shares could be pushed back.

Another risk is stock market volatility. If volatility were to return to the markets, this company – which is still very small – could see its share price drop.

Taking a long-term view though, I think this under-the-radar growth stock has a lot of potential. In my opinion, it is a good play on the ongoing theme of digital transformation.