Shares of Accenture Plc (ACN, Financial) have gained more than 3% since Thursday following the most recent quarterly results. The company's stock had dropped more than 2% immediately after the earnings but it now appears to have fully recovered.
The digital services provider reported its most recent quarterly earnings on Thursday before the market opened beating analyst expectations on revenue and earnings per share. However, the company reported a significant drop in bookings, which prompted the early decline in the stock price.
During the earnings conference call, management also revised upwards its expectations on this year’s revenue and earnings, which could be the reason why the company’s stock managed to recoup all the pre-market losses.
Top line and bottom line growth
Accenture’s EPS increased to $1.93 from the same period last year representing 8% change on an adjusted basis. Revenue also topped the consensus analyst estimate of $11.04 billion with $11.10 billion, which was also a significant improvement from the fiscal third quarter 2018 figure of $10.69 billion.
However, with gross bookings for the quarter declining to $10.6 billion from $11.7 billion reported the same period last year, this affected investor perception of the company’s top-line growth this year. Nonetheless, during the post-earnings call conference with analysts, Chief Financial Officer KC McClure allayed those fears pointing out the volatile nature of quarterly bookings.
"As you know, quarterly bookings can be lumpy ... Looking forward, we have a very strong pipeline, and we expect strong bookings in Q4," McClure said.
When analyzing company performance, a comprehensive financial report includes forward-looking statements that are based on current data, which investors tend to value more than the current performance. As such, McClure’s statement about the company’s pipeline and the expectation on fourth-quarter bookings would have boosted the market sentiment, which explains the immediate rebound in the stock price following the initial pullback.
Accenture’s digital evolution
But there is more to Accenture’s growth prospects than just a strong pipeline. The company is positioning itself to capitalize on growth opportunities in the digital services market.
The company is focusing on becoming one of the leading players in the digital transformation market. It has continued to expand its portfolio of partnerships in this space by teaming up with some of the leading technology companies.
Accenture together with Microsoft Corp. (MSFT, Financial) in their joint venture Avanade launched Accenture Microsoft Business Group, which will help businesses to achieve their digital transformation goals. The new group will focus on helping businesses to migrate to Microsoft Azure and effectively harness the power of data and artificial intelligence.
This development fits well with Accenture’s business model, which is evolving from SMAC (social, media, analytics and cloud) in the digital trends marketplace to DARQ (distributed ledger technology, artificial intelligence, extended reality, and quantum computing).
DARQ effectively covers AI, Blockchain, VR/AR, and quantum computing which also covers IoT and big data. These technologies are tipped for rapid growth in the coming years and could dominate the technology space for several years.
And with many businesses looking to adapt their operations to the latest technological advancements, Accenture appears to be well positioned to facilitate their transition and this will boost its top line growth.
Last year, the company also formed a partnership with Alphabet Inc.’s (GOOG, Financial) (GOOGL, Financial) Google to help Accenture clients to improve the customer experience using the search engine giant’s cloud services.
Accenture’s position in the digital transformation space looks exciting and this could explain why the stock price is up about 30% since the start of the year.
Should you buy Accenture now?
From a valuation perspective, this year’s rally has made shares of Accenture significantly expensive compared to those of close rival Cognizant Technology Solutions Corp (CTSH, Financial), which trade at a price-earnings ratio of 18.11. Currently, Accenture’s stock trades at a price-earnings ratio of 27.68x.
However, after factoring in the projected earnings growth for the next five years, the two stocks are priced relatively the same. Accenture’s PEG ratio (five-year expected) stands at 2.87x while Cognizant’s equivalent stands at 2.75x. It is also good to note that shares of Cognizant are down 12% since the start of last month. This has affected its current valuation, which is why it appears cheaper.
Conclusion
In summary, shares of Accenture appear to have overcome the earlier scare on Thursday after making a full recovery thereafter. Management revised upwards expectations on revenue and earnings and also expects better bookings in fiscal fourth quarter. The next few quarters will be exciting to watch.
Disclosure: No positions in the stocks mentioned.
