In an earlier article here, I explained why Warren Buffett should have invested in Accenture (ACN), as opposed to IBM (IBM). I continue to maintain that belief given strong performance in the former contrasted with the latter's competitive pressures in cloud computing. Multiples analysis and discounted cash flow (DCF) modeling further confirm my outlook.
Although these companies have their noticeable distinctions, they are both service-oriented companies with malleable segments and offerings From a multiples perspective, IBM is slightly the cheaper of the two, but not by a meaningful amount. It trades at a respective 14.3x and 12.2x past and forward earnings while Accenture trades at a respective 15.2x and 12.9x past and forward earnings. This difference becomes insignificant when you consider that Infosys (INFY) trades at 18.6x earnings and Accenture offers a relatively high dividend yield of 2.5%. In addition, Accenture is preferred on the Street with a "buy" rating versus around a "hold" rating for IBM.
At the first quarter earnings call, Accenture's CEO, Pierre Nanterme, further noted strong performance
"I am pleased to tell you about our excellent results for the first quarter, which demonstrate that we continued to execute very well against our growth strategy.
Here are a few highlights. We delivered strong new bookings of $7.8 billion. We grew revenues 14% in local currency, to $7.1 billion, with all 5 operating groups and all 3 geographic regions delivering double-digit growth. Earnings per share grew 19%, to a record $0.96. Operating income was $981 million, our highest ever, with strong operating margin of 13.9%. We continued to have a very strong balance sheet, ending the quarter with a cash balance of $5.1 billion. And we continued to return cash to shareholders, through share repurchases and the payment of a semiannual cash dividend of $0.675 per share, which was a 50% increase over our prior dividend".
First quarter EPS of $0.96 was meaningfully ahead of $0.91 consensus and resulted from double-digit growth in all segments and geographies. Even in Europe, the company performed well. Consulting was up 11% to $4.1 billion while outsourcing leaped 18% to $3B. In addition, employee attrition also declined 12% bps to 12%. These strong results followed a strong close to the end of fiscal 2011.
With that said, management has suggested a cautious outlook and all 14 of the latest revisions to EPS have gone down for a net change, however insignificant, of -0.5%. The flexibility in G&A helps reduce vulnerabilities to poor macro trends, but forex headwinds continue.
Consensus estimates for EPS forecast that it will grow by 12.1% to $3.81 in 2012 and then by 10% in both of the following two years. Assuming a multiple of 16x and a conservative 2013 EPS of $4.12, the rough intrinsic value of the stock is $65.92, implying 22.2% upside. Modeling a compound annual growth rate (CAGR) of 10.7% for EPS over the next three years and then discounting backwards at a weighted average cost of capital (WACC) of 9% yields a figure of $58.69. This may not be the greatest risk/reward, but it still provides a bit of a hedge against a struggling domestic economy; hence the strong performance in Europe.
As for IBM: The company claims that its Power Systems could run Oracle (ORCL) at a lower cost, but serious competitive pressures call this in to question. In my view, the market may be unwittingly, and irrationally, assuming an "everyboy-wins" scenario for cloud computing. The reality of the situation is that HP (HPQ), Cisco (CSCO), and Dell (DELL) all have solutions of their own and no softy will be slicing the revenue pie.
Consensus estimates for IBM's EPS forecast that it will decelerate: Growing 16.1% to $13.37 in 2011 and then by 10.9% and 9.8% in the following two years. Assuming a multiple of 14x and a conservative 2012 EPS of $14.25, the rough intrinsic value of the stock is $199.50, implying 10.5% upside. Modeling a CAGR of 12.2% for EPS over the next three years and then discounting backwards at a WACC of 9% yields a figure of $206.89. Accordingly, I agree with the "hold" rating on the Street.