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Technology and service companies like ACN are positioned to do very well as economies around the wrold recover.

As detailed in our report in tech sector ETFs, tech stocks are far and away the most profitable. That sector’s returns on invested capital (ROIC) stand at 42.3%, which is more than double the S&P500 at 17.4%.

And this week’s stock pick of the week is no exception. Accenture Plc (ACN), one of December’s Most Attrac­tive Stocks, boasts a 43% ROIC. And like all of our Most Attrac­tive Stocks, the com­pany has (1) high and ris­ing eco­nomic prof­its (as dis­tinct from account­ing prof­its) and (2) a cheap val­u­a­tion.

As shown in our free report on ACN, the company’s return on invested capital (ROIC) (43%) is in the top quin­tile of all the com­pa­nies we cover and its eco­nomic earn­ings are higher than reported accounting earnings. During its last fiscal year, ACN’s economic earnings rose to $1,801 while accounting earnings rose to $1,781. ACN is one of only 71 companies of the 3000+ we cover that whose economic earnings are higher than its accounting earnings. It is quite rare for a company to have higher economic earnings than GAAP earnings given that the accounting rules enable companies to overstate their GAAP profits so easily.

At the same time, the stock’s val­u­a­tion implies that ACN’s prof­its will decline by 9% and never grow again. In other words, the stock mar­ket is pre­dict­ing a per­ma­nent decline of 9% in ACN’s prof­its. Given that most investors are not aware that the company’s operating profits are as strong as they are, the market is probably not giving ACN appropriate credit for its profitability.

In summary, the mar­ket is set­ting the profit growth bar quite low for this stock.

HIDDEN GEMS:

  1. Our dis­counted cash flow analy­sis shows that ACN’s cur­rent val­u­a­tion (stock price of $48.59) implies that the company’s prof­its will decline by 9% and never grow again.
  2. Eco­nomic earn­ings are higher than reported accounting earnings.
  3. Excess cash of $3,728mm or about 12% of its market cap

For details on what causes the dif­fer­ence between eco­nomic ver­sus account­ing prof­its, see Appen­dix 3 on page 10 of our report on ACN. See Appen­dix 4 to learn how ACN increased net operating profit after tax (NOPAT) by cut­ting costs and increased its NOPAT mar­gin from 9.0% to 9.2%. See Appen­dix 5 for details on how ACN reduced its invested cap­i­tal while revenue grew and raised its invested cap­i­tal turns from 4.68x to 4.75x. Appen­dix 7 (in the ROIC sec­tion) shows how the com­pany’s increase in NOPAT mar­gin and invested cap­i­tal turns result in an increase in ROIC (from 42.0 to 43.5%).

In summary, ACN is gets our “very attractive” stock rating because its economic earnings are strong and growing while its valuation implies economic earnings will decline permanently by 10%.

ACN fits the risk/reward pro­file of a great stock to buy.

Note: Stock pick of the week is updated every Tuesday.

Source: Market Not Recognizing Accenture's Profitability?