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Accenture (NYSE:ACN) has been the talk of the street lately after posting spectacular F2Q11 results. It reported revenues of $6,054 mn (up 18% YoY) and EPS of $0.75 (up 19% YoY) as compared to the consensus estimate of $5,768 Million and $0.71, respectively. The current growth is the highest level of growth for Accenture since 2001. Its consulting bookings increased by 2.1% on Quarter over Quarter basis, while outsourcing bookings increased by 23%.

Current Quarter results indicate strong demand for IT services as the global economy continues to recover. However ,the bigger debate now on The Street is whether Accenture’s significant PE discount as compared to offshore IT players is justified. Accenture is trading at ~17x FY11e EPS, which is a significant discount to offshore IT players. In my opinion, this is not justified as Accenture has shown better EPS growth rate than most of them in the recent times.

EPS Growth and Valuations

The following tables show growth rate and the relative valuation of Accenture over its peers:

Table I

Price

FY10EPS

FY11eEPS

EPS Growth

PE (FY11)

PEG (FY11)

ACN

54.29

2.66

3.14

18.05%

17.29

0.96

IBM

162.18

11.52

13.08

13.54%

12.40

0.92

INFY

69.24

2.3

2.63

14.35%

26.33

1.83

CTSH

80.03

2.37

2.72

14.77%

29.42

1.99

WIT

14.17

0.42

0.48

14.29%

29.52

2.07

Note: ACN’s FY ends in Aug,; CTSH and IBM's FY ends in Dec.; INFY, WIT’s FY ends in March

Table II

Price

CY10EPS

CY11eEPS

EPS Growth

PE (CY11)

PEG (CY11)

ACN(*)

54.29

2.8

3.28

17.14%

16.55

0.97

IBM

162.18

11.52

13.08

13.54%

12.40

0.92

INFY

69.24

2.52

2.94

16.67%

23.55

1.41

CTSH

80.03

2.37

2.72

14.77%

29.42

1.99

WIT

14.17

0.47

0.5

6.38%

28.34

4.44

e

Note (*): Since Accenture's quarter ends in Nov and we do not have exact 3 months ended December data, we have taken data for 12 months ending Nov. for Accenture.


In Table I, I have take Financial Year (FY) numbers. Since the different fiscal year end is expected to affect comparison, I have normalized the numbers by using the calendar year in Table II. However, to provide the closest possible comparison, for Accenture I have taken 12 months ended Nov. data in Table II.

We can see that Accenture’s (at 16.5x PE) is trading at a premium to its consulting peer IBM (12.4x PE). This is justified owing to Accenture's strong growth rate. However, most of the offshore IT companies are trading in high 20s. Accenture’s EPS growth rate for 12 months ending Nov 11 is expected to be 17.14% as compared with expected growth rates of 16.7%, 14.8% and 6.4% (CY11e) of Infosys (NYSE:INFY), Cognizant (NASDAQ:CTSH) and Wipro (NYSE:WIT) respectively. Thus, it’s clear that Accenture’s high earnings growth is not getting rewarded by investors.

Secular growth in areas like cloud computing, virtualization, etc. coupled with Accenture’s strategy to shift work to low cost destinations like India, are likely to continue driving strong EPS growth rate for Accenture going forward. Hence, I believe there is ample scope for multiple expansion for Accenture once The Street realizes the true potential of the company and its undervaluation as compared to offshore IT players.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Is Accenture Significantly Undervalued as Compared to Offshore IT Players?