Paul Price

Accenture: Rebounding from Infamy

Barrons loves Accenture...

MONDAY, SEPTEMBER 28, 2009
TECHNOLOGY TRADER - Barrons

A Bargain in Tech? That's Accenture By ERIC J. SAVITZ

Accenture is one of the sector's few bargains left.

THERE'S PLENTY TO LIKE ABOUT DELL'S PLAN to acquire Perot Systems for $3.9 billion in cash. The two Texas companies are practically neighbors -- it's just 200 miles up I-35 from Dell (ticker: DELL) headquarters in Round Rock to Perot's (PER) home base in Plano -- which could make integration easier. The deal gives Dell better footing in the lucrative health-care sector, which accounts for half of Perot's revenue. It also gives Dell more muscle outside the U.S., since more than 8,000 of Perot's 23,000 workers are based in Asia. And it moves Dell more heavily into services, where it trails rival Hewlett-Packard (HPQ).

But while I grant all that -- Yeesh! -- is the deal ever expensive. Dell is paying 1.5 times the past 12 months' sales, and 29 times projected calendar 2010 earnings per share -- a dramatically higher valuation than the 0.6 times sales and 19 times EPS Hewlett-Packard paid for the other Ross Perot services company, EDS. (For more on the Dell deal, see Follow-Up.) The $30 price tag is a 68% premium to the pre-deal price of Perot shares.

As one large tech company after another looks to emulate the IBM (IBM) model and rush into the services market, there are still a few bargains left for the ordinary investor. Consider Accenture (ACN). Bill Smead, founder of Seattle-based Smead Capital Management, thinks Accenture is a better company than Perot in almost every way. "You can look at every statistic, the balance sheet, margins, ROE -- Accenture is a superior company," he says.

And yet, Accenture trades at just 13 times estimated EPS for the August 2010 fiscal year -- less than half what Dell is paying for Perot. As Smead notes, Accenture has survived the recession with barely a scratch. The Street sees fiscal 2009 earnings of $2.68 a share, up a few pennies from last year, with revenue down about 8%, much less than most enterprise-focused hardware and software companies.


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Accenture is also a lot bigger, with a market cap of $26 billion. That makes it an unlikely takeover target for any but the largest tech players. There's no deal premium in the stock. On the other hand, Smead sees Accenture playing a key role in the imminent launch of Microsoft Windows 7. It should get plenty of work implementing the new software once it is adopted by big businesses.

Smead also loves Accenture's model: hiring tech-savvy kids right out of college, making them work long days for large corporate clients, paying them $50 an hour, and then billing them out at $250 an hour. He thinks it is a good deal for the kids, the customers and, especially, Accenture.

Smead is willing to sit on his Accenture position for a while; he's a buy-and-hold man. Eventually, information-technology spending will pick up, everyone will adopt Windows 7, and Accenture's flattish revenue will begin to grow again. Accenture could be a $75 stock in three or four years, roughly double its current price, he figures.

Accenture: Rebounding from Infamy

Barrons.com likes ACN…

Emphasizing Accenture’s Long-Term Upside
Baird initiated coverage of the consulting firm at Outperform.

Accenture (NYSE: ACN)
Robert W. Baird ($33.33, Sept. 3, 2009)

WE ARE INITIATING COVERAGE of Accenture (ticker: ACN) at Outperform with a price target of $43. Accenture has a strong franchise with first-rate client relationships, and a large number of offerings that serve a wide range of industries. The model generates strong returns and cash flow. While 2009 remains weak, we see increased consulting activity and bookings as evidence that business should improve in 2010.

Over the long run, we believe Accenture will drive 10% to15% growth given its strong position and sizable market opportunities. It’s the No.2 player and has over 400 total product and service offerings.

The company invests regularly to “stay relevant” with new offerings to its 4,000 clients, which participate in over 40 vertical markets. This diverse platform provides avenues for strong growth, and many offerings, such as business-process outsourcing, can be driven by periods of economic weakness. We view the market as fragmented given that even the top players have less than 10% market share and view this as an opportunity for the strongest players.

Accenture has over 177,000 personnel with a wide variety of deep domain knowledge and service offering expertise on a global basis. Accenture’s industry knowledge not only helps generate relevant service offerings, but also enables strong client relationships. In addition, Accenture has been developing its proprietary methodologies for over 50 years. This level of intellectual capability is difficult to replicate and serves as a meaningful competitive advantage. In our view, only IBM (IBM) Global services can match Accenture for this level of capability.

Accenture is also well understood to have excellent relationships at the highest executive levels of its clients; even key competitors admit this.

Accenture has been delivering thought leadership and strategic advice to Fortune 500 companies since it was only a small segment within Arthur Andersen. These long-standing relationships are important in helping Accenture to drive incremental business. Of Accenture’s top 100 clients, 87 have been clients for 10 years or more.

The company has $4.0 billion in net cash, and consistently generates $2.3 billion to $2.5 billion in free cash flow each year. Returns are strong — return on equity and return on invested capital were both 60% in the trailing 12 months. Management deploys its excess cash to shareholders though a modest dividend and regular share repurchases.

Accenture focuses primarily on the Global Fortune 500, which together generate over $10.5 trillion in revenue. We believe this group alone will spend roughly 1% to 2% of revenue on strategic consulting and system integration, and 3% to 4% on outsourcing initiatives, suggesting an addressable market of roughly $500 billion for the top consultants serving this group ($900 billion total market). We believe increasing business complexity, the Internet, regulatory changes, and the need to drive improvement from the downturn are all key drivers for increased penetration of Accenture’s service offerings.

Accenture: Rebounding from Infamy

Note: There is a typo in the chart of the buy/write transaction.

The Ticker symbol should read ACN ... not CAN.

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