Accenture: Poised to Grow

Accenture (ACN) is a global management consulting, technology services and outsourcing company. As the global economy recovers, the strategy of many companies will be to find ways to improve their operations without having to hire more people. This is an opportunity that Accenture and the other service firms such as Hewlett Packard (HPQ), IBM (IBM) and Dell (DELL) with the Perot Systems (PER) acquisition are positioned to handle.

Overview

With approximately 177,000 employees in more than 120 countries, Accenture generated net revenues of $21.58 billion for the fiscal year ended Aug. 31, 2009. For 2009, new bookings were $23.9 billion, exceeding revenues. Consulting bookings for fiscal 2009 were $12.78 billion and outsourcing bookings were $11.12 billion. These new bookings in the fourth quarter and for the full fiscal year show demand for the company’s services remain solid. The company has $4.5 billion in cash with no debt.

Consulting revenue has fallen, down 19% from a year ago due to pricing pressures. In addition, clients are cautious about initiating large projects as they favor smaller programs that have more immediate payback. This is likely to continue for the next quarter, as clients continue to manage their expenditures more carefully.

Outsourcing revenues actually grew on a local currency basis, though at a slower rate. Clients are slower to expand current contracts, and when they do they are seeking to deploy lower cost resources with lower pricing. Furthermore, clients in the Financial Services sector are more inclined to cancel contracts as they struggle with strategy changes and in some cases consolidation.

Margins actually expanded for the year, coming in at 31.7% for 2009 vs. 30.7% in fiscal year 2008. This is a good indication the firm is keeping costs in line with revenues, as Accenture is sustaining its profitability during the recession. Its utilization of people (people working on billable engagements) came in at 86% in the fourth quarter, rising from 83% in the third quarter. This is an excellent number that contributes to the solid margins the firm is able to achieve.

Should the global economy keep improving, we should expect consulting and outsourcing revenues to turn up in Accenture’s second quarter of their fiscal year or the beginning of 2010. Keep in mind there is a several month delay from booking a new engagement before revenue starts flowing.

The strategy of many companies is to keep raising their productivity by finding better ways of operating their business. In doing so, they will consider the services of firms like Accenture, which bodes well for them in 2010.

Fundamental Review
Stock Review		Risk Factors
Sector	Technology - Service	Beta	0.63
Dividend Yield	1.30%	Insider Ownership	0.29%
Earnings Announcement	12/17 - 27/2009 after the market closes	Institutional Ownership	79%
Value Analysis		Growth Analysis
Return on Capital	210%	PE Ratio	15.4
Earnings Yield	20.3%	PEG Ratio	1.07
Free Cash Flow Margin	11.7%	Enterprise Value/Free Cash Flow	5.2
Free Cash Flow Yield	15%	Quarterly Revenue Growth (yoy)	-16%
Cockroaches	none	Quarterly Revenue Forecast (yoy)	-9.4%

Value

Accenture generates an exceptional Return on Capital and Earnings Yield partly due to its being a service firm. This makes Accenture a good large value play.

Accenture's Free Cash Flow Margin reflects the firm's ability to generate sufficient cash flow to fund its growth. The Free Cash Flow Yield provides a nice return for shareholders as well.

So far, Accenture has been able to weather the global recession. As a result, they remain a very good buy for value investors.

Growth

Accenture' growth has slowed with the recession. Revenue is expected to be flat to slightly down over the next several quarters, however the company's PE ratio is quite low and its PEG ratio remains close to 1.00, indicating growth potential. The company's Enterprise Value/Free Cash Flow ratio is significantly below their PE ratio, an indication they are generating significant cash flow.

It will be important to monitor the revenue growth for Accenture in the next few quarters.

Conclusion

Accenture continues to do well during the global recession. It offers investors growth at a reasonable price, meaning it is suitable for both value and growth oriented investors.

As a services firm, future revenues will come from new bookings. In the latest quarter, new bookings of $5.15 came in just above revenues of $5.14 for the quarter indicating the company is not eating into its prior bookings to sustain revenues. As long as bookings remain above revenues, the firms will be able to sustain itself. Once bookings start to climb, Accenture will see its revenues turn up shortly thereafter.

Key Drivers and Barriers

Drivers (outside forces)

The key drivers for Accenture are:

1. Global need to lower cost and improve productivity by companies throughout the world seeking to remain competitive.
2. The evolution of technology that provides new capabilities for companies throughout their supply chains.

Barriers (sustainable advantages)

The barriers ACN has in place to help sustain its leadership position are:

1. The demand for services that are reflected in the company's bookings. As long as this is growing faster than revenues the company is doing well.
2. The rate per hour and utilization rate help explain the company's pricing power.

Risks

A large company may not be able to move quickly in a key direction to take advantage of new opportunities. As they get larger, it is more difficult for a new business to have a material affect on the overall company.

The recession is hurting the U.S. and global sales.

Guidance

For the fiscal year 2010, Accenture expects new bookings to be in the range of $23 billion to $26 billion. Management expects the net revenue growth rate for the full fiscal year 2010 to be in a range of a 3% decline to a 1% increase in local currency over fiscal 2009. This range reflects the anticipated decline in revenues in the first half of fiscal 2010 year-over-year. It also reflects the aggregate effect of outsourcing contract cancellations in fiscal 2009, which will show up in as 2% fall in net revenue growth for fiscal year 2010 local currency net revenue. Earnings per share for fiscal 2010 should be in the $2.64 to $2.72. For the first quarter, revenues should be in the range of $5.3 billion to $5.5 billion.

The company is looking for operating cash flow to be in the range of $2.39 billion to $2.59 billion, capital expenditures to be $290 million, and free cash flow to be in the range of $2.1 billion to $2.3 billion.

Other Considerations

During the fiscal 2009 year, Accenture repurchased $1.9 billion of shares. The Board approved $4.0 billion in additional share repurchase authority. At May 31, 2009, Accenture had approximately 733 million total shares outstanding, including 614 million Accenture Ltd Class A common shares and minority holdings of 119 million shares (Accenture SCA Class I common shares and Accenture Canada Holding, Inc. exchangeable shares).

In addition, the Board of Directors declared an annual cash dividend of $0.75 per share a 50% increase. The Board also changed to paying dividends on a semi-annual schedule starting with the third quarter of fiscal 2010.

The Bottom Line

Buy on dips in the price. Look to protect your position with covered calls and protective puts. Be ready to sell if the investing theme does not work as expected.

Comments

[tintoys:]

ACN remains a consistent, formidable and (importantly) an ethical competitor worldwide. Remnants of the previous "partnership" structure provide a solid underpinning for the ACN's view of itself. Margins are surprisingly firm, indicating a bend-not-break attitude toward low-ball pricing from companies who have little else to offer. The services business remains attractive, but weaker companies (such as Perot and Computer Sciences) will likely disappoint those that acquired them.

Oct 09 04:21 PM

[CaptainJJack:]

I own Accenture, and I regard it as a very solid company.

However, I have a stop-loss at $38, and I tightened it substantially over the last few days. I expect I may be out of it over the next few weeks.

While I like the company, at the current prices, I don't love the stock, and I've learned the hard way over the years, that there is a big difference between a company and a stock.

What leads this company's stock performance is the book to bill ratio, especially in consulting, and that has deteriorated with the economy. While the stock has had a huge run, it is mostly in improving multiples and was justified by the incredible ROE, in my opinion.

But, it is currently trading at over 8 times book, so ratios such as ROE or ROI, which are based on book value, are now close to meaningless as far as the stock price goes.

From everything I can figure out, the growth rates will be flat, with risk to the downside, and the stock is trading at around a 15 P/E. I figure it is pretty much fully valued until its prospects improve.

So, I have had a great run. I started buying at 28, and most of my buy was at 30. It may go to 40, but it may fall back. I put the odds at 50/50.

In general, I am very cautious about the next few years. While I consider Bernanke and Paulson to be heros for saving us from a depression, there are going to be downsides: there isn't any area of economic activity that isn't currently backstopped in one form or another by the government, and this cannot end well.

SO I am happy the market has recovered, but as my stock/bond ratios get above my objectives, I am a seller, not a buyer.

Oct 10 09:25 AM