A mistake many investors make is to buy or sell common stocks based on GDP forecasts. Although it seems logical that a business will grow or decline in line with a country’s Gross Domestic Product, that logic is not always reflected in stock prices. By taking some cues from a few great companies whose business is dependent on other businesses, we have improved our forecasting ability. These businesses include the railroads, technology giants, some multi-line manufacturers and the company I will be focusing on today, Accenture Plc., one of the world’s largest management consulting firms.
Accenture recently reported second quarter earnings of 75 cents, easily beating the Zacks Consensus Estimate of 71 cents. These earnings were 25% higher than the same quarter last year. That is a good indicator that the business of consulting and outsourcing is firing on all cylinders. With outstanding earnings growth, supported by increased revenues, the stock price increased by 4.5% on the day of the release.
Accenture provides its services to 94 of the Fortune Global 100 and more than three quarters of the Fortune Global 500. You can learn a lot by observing where Accenture’s customers are spending their money and what they are spending it on. Accenture’s CFO, Pamela Craig, offered some comments on just these things during the company’s second quarter conference call:
...Technology Consulting bookings grew again this quarterThe primary driver is ERP (Enterprise Resource Planning), as clients are streamlining their operations and reducing costs:The work reflects implementations of SAP, Oracle and Microsoft platforms…
On Financial Services:
...Our services to help clients achieve compliance with risk and regulatory changes drove momentum this quarter.
On Communications and High Tech:
...Consulting demand continues to be driven by cost takeout, customer acquisition and retention.
Health and Public Service:
...we experienced very strong growth, reflecting demand for cost reduction services and for our offerings in back-office transformation, health administration and electronic medical records.
...let me note the record high revenues in the Americas, driven primarily by the United States, with Brazil and Canada also posting exceptionally strong year-on-year growth.
Pierre and I were just talking with our leader there last night. And some projects stopped but have restarted.
Yes, I mean, for hot skills, we always have contractor needs, and those are higher now.
Here is my take.
Cost controls will drive margins higher, except within the Financial Services and Health Care sectors which are struggling to meet new regulatory requirements. Software providers are in the sweet spot for revenue growth, yet margins could be pressured due to the lack of qualified personnel. Unemployment will remain high in the near future. The sweet spot for investment is companies operating in the Americas. And most importantly, Accenture’s customers are spending cash that will drive revenue growth and increase margins; both of which are favorable for investors of common stocks. Disclosure:
I am long ACN