Accenture (ACN) reported fourth quarter and full year earnings. The top-line numbers were solid and were accompanied by margin expansion. That follows valuations that declined following disappointing third quarter results.
That said, the valuations have stabilized and there are visible signs of accumulation. I think common equity shares of Accenture remain undervalued by about 15%. The valuations include the recently released financial data.
I think Accenture is a "buy" on valuations and favorable industry dynamics. The current share price is a good level to accumulate shares with a trailing stop loss starting at $69 per share.
- Accenture and SAP AG (SAP) announced an expansion of their global alliance to simplify the process for clients to purchase and implement SAP products through Accenture.
- Accenture was awarded the 2013 Oracle Excellence Award for Specialized Partner of the Year.
- Accenture completed its acquisition of ASM Research in a move to strategically expand its U.S. defense business in the growing military health market.
- Accenture has been helping companies in different regions of the world roll out mobile payment systems.
Peer Company Comparisons
I'll use Infosys (INFY), IBM (IBM) and Cognizant Technology Solutions (CTSH) to assess the relative financial performance of Accenture during the past few fiscal quarters and years. Although there are some differences among the companies, they are a good peer group for comparison purposes. The management consulting and outsourcing industries are highly competitive growth industries.
Accenture's revenue is increasing, but investors are worried about the pace of the increase -- with good reason. On the other hand, IBM's revenue from Global Services is trending lower. But, IBM"s Global Services segment is twice the size of Accenture by revenue. Accenture is beating IBM in the market.
Infosys's revenue is trending higher. The company has a higher revenue growth rate than Accenture but is about a quarter of the size in terms of revenue. Also of note, Accenture doesn't have a scale advantage over Infosys in terms of gross or operating margin.
In terms of revenue, Cognizant Technology Solutions is also about a quarter of the size of Accenture. Further, Accenture does not have a scale advantage over Cognizant, in terms of operating margin. Lastly, Cognizant's revenue is increasing at a faster rate than Accenture's revenue. Cognizant is beating Accenture in the market.
Based solely on this analysis, investors should be bullish on Cognizant and Infosys. They should be neutral on Accenture and bearish on IBM. This is a growth industry and Accenture's management's goal is to grow faster than the industry, so, we'll see if the last couple of quarters were a bump in the road or a sign of a larger problem.
The full year report was good: bookings came in strong on outsourcing growth, and revenue growth was roughly inline with the industry. Also, the fourth quarter numbers were solid. Revenue growth was solid and the profitability was inline with my expectations. I'm going to continue to monitor weakness in Asia operations and consulting.
For fiscal 2014, I'm expecting revenue growth of about 3% with an operating margin of 14.5% and a net income margin of 12%. That said, management targets revenue growth in the high single digits and EPS growth in the low double digits; the industry grows in the mid-single digits. Also, EPS should be positively impacted by the share repurchase program. There is some room for Accenture to surprise on the upside -- relative to my forecast.
Currently, I think Accenture's dividend growth rate isn't sustainable but it will decline to a sustainable rate of 4.5% over the next 4 years. The discounted cash flow model estimates the intrinsic value of Accenture as $87.54. Accenture is 15% undervalued relative to its current market price of $75.87.
Using the recent earnings report's twelve trailing months adjusted EPS of $4.36, 21.8% of the market price of Accenture shares is attributable to EPS growth. If I use a forward PE ratio, 16.3% of Accenture's share price is attributable to EPS growth. Consequently, I think the market is mispricing the growth opportunities of Accenture. That is probably a result of the disappointing earnings report following the previous quarter.
So, I think Accenture is undervalued by about 15% as investors are currently underestimating the growth opportunities of the firm.