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An Interesting Value Play In The IT Consulting Industry

November 23, 2013 | About:
The world’s second largest technology consulting company Accenture (ACN) is quite optimistic about its future, despite the slowdown of the industry’s growth. The company has been investing to enhance its capabilities and is eying expansion in digital marketing, mobility, analytics and cloud. To achieve this objective, Accenture will continue with its inorganic growth and will spend more than $800 million on accusations in the coming year. The business has reported significant growth in top and bottom line. Its strength lies in its strong customer base which includes some of the leading corporations from around the world. However, the company’s profitability has been considerably lower as compared to some of its biggest rivals.

Top and Bottom Line

Over the last couple of years, Accenture has been able to grow its top and bottom line.



In its most recent quarterly results, Accenture reported revenue growth of 3.7% from the saw quarter last year to $7.09 billion while earnings rose 14.8% to $1.01 per share. For the three months ending August, 2013, Accenture reported a record level of new bookings of $8.4 billion.

The business also generated free cash flow of $2.9 billion, which was above its expectations. It now boasts of cash reserves of $5.6 billion. Therefore, it’s no surprise that Accenture continues to reward its shareholders with buybacks and dividends. The company has increased its semi-annual dividend by 14.8% from to $0.93 per share while its board has approved a new $5 billion shares repurchase program.

Strong Customer Base

Accenture’s strength lies in its premiere list of customers that range from automotive to aerospace to energy industry and includes 91 of the Fortune Global 100 companies and more than 75% of the Fortune Global 500.

Moreover, not only Accenture works with some of the biggest names in the industry, it has also been able to successfully retain them over a number of years. Out of its 100 biggest clients (in terms of their contribution to the company’s revenues), 99 have been associated with Accenture for over 5 years. Out of these 99, 91 have been working with Accenture for more than 10 years.

Analysts have also pointed out that Accenture had 130 diamond accounts by the end of its previous fiscal year. A diamond account is one that contributes more than $100 million to the company’s revenues in a fiscal year.

Through a decade of operations, Accenture has shown that its solid customer base is a reliable revenue stream that would yield significant returns for the shareholders in the long run.

Below Average Profitability

On the other hand, while Accenture has achieved growth, it has struggled with profitability. The company’s trailing operating margin of 13.8% is below the industry’s average of 14.5%. Moreover, the company is well behind some of its biggest rivals, such as India based Infosys (INFY) and New York based IBM (IBM).

Over the years, Infosys’s profitability has fallen but it still reports profit margins of more than 18%. Similarly, IBM’s profit margin has averaged above 15%. However, since 2010, Accenture’s profit margin has largely remained in the high-single-digits, significantly below some of its leading rivals.



Profitability has clearly not been one of Accenture’s strengths but during the conference call, the management has predicted an improvement in the current fiscal year.

Annual Guidance

For the current fiscal year which has just started, Accenture has targeted revenue growth of between 2% and 6% while EPS is expected to be in the range of $4.42 to $4.54. The operating cash flow is expected to be in the range of $3.6 billion to $3.9 billion and free cash flow will be between $3.2 billion and $3.5 billion. The company will work to improve its profitability and its operating margin for 2014 will increase by 10 to 30 basis points to between 14.3% and 14.5%, which will be in-line with the current industry’s average.

In addition to this, Accenture is expecting new bookings of between $32 billion and $35 billion for the current fiscal year. In the previous year, Accenture clocked new bookings of $33.3 billion, an all time high record. If it manages to touch the mid-point of its new guidance, then it would beat its all time high record by $200 million.

Value Play

Despite below average profitability, Accenture is poised for long term growth. The company’s shares are trading at just 15.8 times its trailing earnings, which is significantly below the industry’s average of 38 times. Similarly, the shares are priced just 1.74 times annual sales. Moreover, Accenture gives attractive yield of 2.4%, which is not that common in this sector. Therefore, I believe Accenture can be an interesting value play and could be a healthy addition to your portfolio.

Notes:

Accenture’s FY2014 Guidance

Accenture Reports Fourth-Quarter and Full-Year Fiscal 2013 Results; PR

Accenture Earnings Conference Call Transcript [img]%3Ca%20href=%22http://ycharts.com/companies/ACN/chart/#/?startDate=11/23/2009&endDate=11/23/2013&format=real&series=mut:,agg:last,freq:,calc:revenues,type:company,id:ACN,,mut:,agg:last,freq:,calc:eps,type:company,id:ACN&zoom=custom&maxPoints=550%22%3E%3Cimg%20src=%22http://media.ycharts.com/charts/9e90e1bd24507afbe1ec5348812f65d5.png%22%20alt=%22ACN%20Revenue%20%28Quarterly%29%20Chart%22%20/%3E%3C/a%3E%3Cp%20style=%22font-size:%2010px;%22%3E%3Ca%20href=%22http://ycharts.com/companies/ACN/revenues%22%3EACN%20Revenue%20%28Quarterly%29%3C/a%3E%20data%20by%20%3Ca%20href=%22http://ycharts.com%22%3EYCharts%3C/a%3E%3C/p%3E[/img]

Disclosure: This article was written by Sarfaraz A. Khan, with valuable contribution from Gohar Yousuf, research assistant at Half Bridge Business Review. Neither Sarfaraz A. Khan, nor Gohar Yousuf have any positions in the stock(s) mentioned in this article.

About the author:

Sarfaraz A. Khan
Sarfaraz A. Khan is a capital market analyst and finance writer. His specialty lies in energy stocks. He also covers consumer goods, services sector, technology stocks, emerging markets and ETFs. His work appears on TheStreet, Seeking Alpha, Motley Fool and GuruFocus.

Visit Sarfaraz A. Khan's Website


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