Accenture Earnings Review: Stock Should Outperform over Time

I covered earnings for Accenture (ACN) over at AOL Money + Finance, and want to use this opportunity to dive more into the conference call and prospects for the stock. First, the numbers were pretty strong, with the main drag being currency-related.

From the earnings write-up (“Accenture shares rise on earnings beat”):

Earnings per share for the quarter ending May 31 were $0.68 on $5.15 billion in revenue, compared to the $0.64 average and $0.67 high expected from analysts. The consensus revenue target was $5.2 billion, and results were hurt by currency translation effects, which reduced U.S. dollar results by 12%. Year-over-year, EPS was down 8% from the $0.74 earned in the same quarter last year, with the difference again attributable to currency exchange.

Future bookings, at $6.6 billion – more or less equally divided between consulting and outsourcing – were also good, keeping the company on pace to continue hitting their estimates. Management granted that clients were being conservative about undertaking costlier, longer-term projects and preferred to focus on cost-cutting and expense management solutions that would make a more immediate impact on the bottom line, and this had led to some pricing pressure.

Overall though, margins have been rising and attrition is down, which all fits into the thesis I laid out last September.

Free cash flow for the quarter came in just under $1 billion, and the company continues to use some of that to retire shares. Cash on the balance sheet now stands at $4 billion, for a company with a market cap of $20 billion.

In Q&A with analysts, management was optimistic that the recent margin expansion could be maintained. Overall gross margins for the quarter were 32.5%, and operating margins were 14.2%; these compare to historical ranges of 28% to 30% for gross margins, and 10% to 12% for operating margins. The margin boost has really helped hold the line on results, so if they can maintain those profitability levels when business rebounds, you’re looking at “incremental” earnings in the $500 million range.

How is the global landscape looking? China and Latin America are still growth opportunities “regardless of the economy”; Spain, Italy, and France were cited as places that are lagging, with Scandinavia and Germany doing relatively better in Western Europe.

Although guidance for the next fiscal year was not given (next quarter’s guidance was raised), an important longer-term point was raised in response to a question about expectations for next year relative to previous downturns. From Bill Green, CEO, Accenture:

The needs are there. The work is there. The people that have the global agendas around consistent operating platforms and performance improvement things are all there. People have been taking small bites and I think somewhere along the line here we are going to get back into the bigger, more transformational type assignments.

Accenture has been flat over the last six months (S&P 500 up 5%), though the stock is off less than the S&P 500 over the last year (-20% vs. -30%).

For a large-cap stock, I find the price relative to the earnings power here to be surprisingly favorable. Even in a bad global economy, Accenture has been well-managed and its services are still in-demand at profitable rates. As the company redeems restricted stock or otherwise repurchases shares on the open market, it will increase EPS and reduce the large cash hoard – typically a good thing to have, but overkill in this case.

Consulting may be a competitive business and the intellectual or human capital involved may be difficult to quantify for purposes of investment returns, but I believe the stock will be a double-digit gainer and handily outperform the market over time.

• Accenture data from Gridstone Research.
• Accenture (ACN) Q3 FY 2009 conference call transcript.

Disclosure: None

Comments

[User 8227:]

Do you have any thoughts as to how the July vesting of the last wave of partner options will affect the stock?

Jun 29 10:14 AM