In a recent all-cash deal, European IT giant Cap Gemini agreed to buy Igate (IGTE, Financial) for about $4 billion. This deal has put focus back on IT Services space which, despite having exposure towards high growth areas like cCloud, mobile and data analytics, is still attractive in terms of valuations. One stock which I like the most in this sector is Accenture (ACN, Financial). According to Gurufocus DCF Calculator, the company has business predictability rating of 4.5 stars and offers margin of safety of 24%.
Accenture is one of the world’s leading professional services companies, providing management consulting, technology and outsourcing services to clients across a broad range of industries. The company employ more than 305,000 people and have offices and operations in more than 200 cities in 56 countries. Its revenues before reimbursements (“net revenues”) were $30.0 billion for fiscal 2014.
Accenture operate globally with one common brand and business model designed to enable it to provide clients around the world with the same high level of service. Drawing on a combination of industry and functional expertise, technology capabilities and alliances, and its global delivery resources, the company seek to provide differentiated services that help its clients measurably improve their business performance and create sustainable value for their customers and stakeholders. Accenture's global delivery model enables it to provide an end-to-end delivery capability by drawing on its global resources to deliver high-quality, cost-effective solutions to clients.
Last quarter, Accenture reported strong earnings and raised it constant-currency revenue growth guidance to 8%-10% (versus earlier estimate of 5%-8%). JP Morgan's Tien-tsin Huang, who has an Overweight rating on Accenture, called this magnitude of guidance increase "rare" and enough to drive the stock higher. Another analyst, Bryan Keane of Deutsche Bank, who also has a buy rating on the company, commented,
"After multiple years of sub-ACN standards for top-line growth (consulting grew flat Y/Y for several qtrs), ACN is back to taking considerable market share in IT Services. Over the last 3 years leading up to the recent outperformance, ACN has invested heavily in developing the right services and solutions investing $800m annual in-organic and $2bn in annual R&D in the Digital and Operations businesses, promoted new leadership and hired people with the right skills (1000 PhDs moved into data analytics). Approximately 60% of ACN’s deals are sole sourced (very high compared to industry average which reflects on the deep client relationships and quality of service) and the increased win rates and higher bookings conversion is driving accelerated growth. For the next several qtrs, we believe ACN could achieve low double digit to high single digit constant currency rev growth rates (comps will get even tougher in FY16)."
Accenture is trading at 18.6 times its forward earnings. The company has a dividend yield of 2.20% and its EPS is expected to grow 8.6% next year. I rate the stock a buy at current levels given its good growth prospects and reasonable valuations.
