3 Service Firms That Wall Street Loves

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 |  Includes: ACN, IPG, VOD
by: Takeover Analyst

What follows is a list of service companies that are rated favorably on the Street. They cover a variety of specific industries: business support, mobile telecom, and media agency. Vodafone (NASDAQ:VOD) is preferred due to its attractive multiple multiples and top-line momentum. The company is trading at 82% of the PE multiple of peers and offers a strong dividend yield to hedge against macro volatility.

Accenture (NYSE:ACN)

Accenture is rated a "buy" and trades at a respective 16.1x and 13.5x past and forward earnings with a dividend yield of 2.4% and a free cash flow yield of 6.5%.

Consensus estimates for Accenture's EPS forecast that it will grow by 12.1% to $3.81 in 2012 and then by 10.5% and 9.5% in the following two years. Modeling a 3-year CAGR of 10.7% for EPS and then discounting backwards by a WACC of 9% yields a fair vale figure of $58.69, implying just 3%. The firm nevertheless strong first quarter earnings that kept the momentum going from the strong close to 2011. Revenues grew 14% in local currency as net bookings stood at an impressive $7.8B. EPS of $0.96 beat consensus by 5.5% and management boosted dividends by 50%.

Vodafone

Vodafone is rated a "strong buy" and trades at a respective 12.6x and 10.2x past and forward earnings with a dividend yield of 5.3%.

Consensus estimates for Vodafone's EPS forecast that it will decline by 1.1% to $2.58 in 2012 and then grow by 5% and 5.5% in the following two years. Assuming a multiple of 14x and a conservative 2013 EPS of $2.65, the rough intrinsic value of the stock is $37.10, implying 35.4% upside. Core European markets are picking up with data gaining 25% in the third quarter off of solid smartphone penetration. The company may also IPO its Indian business following the recent tax victory. This timed well for the country's 3G build out.

Interpublic Group of Companies (NYSE:IPG)

Interpublic is rated a "buy" and trades at a respective 12.6x and 14.3x past and forward earnings with a dividend yield of 2.2% and a free cash flow yield of 6.3%.

Consensus estimates for Interpublic's EPS forecast that it will grow by 38.3% to $0.65 in FY2011 and then by 15.4% and 24% in the following two years. Assuming a multiple of 15x and a conservative 2012 EPS of $0.74, the rough intrinsic value of the stock is $11.10, implying 3.4% upside. The firm is the third largest ad agency in the world and has significant catalysts in emerging markets. Strong liquidity and excellent control over costs help to mitigate risks and complement the dividend yield.

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