Accenture's Minor Sell-Off Is A Buying Opportunity
Summary
- Accenture's most recent quarterly numbers are reviewed.
- Accenture has been busy in the month of March acquiring companies.
- The recent sell off offers an opportunity.
Accenture plc (NYSE:ACN), had a very busy month. This article will review its most recent earnings release, look at its recent corporate activity, and take a look at how the market reacted to all of this news to see if there is an opportunity to either initiate a position or to add to an existing position in Accenture.
Earlier this week Accenture reported their numbers for the second quarter. In summary, Accenture had revenues of $8.76B, net income of $876.7M, and earnings per share of $1.33. In my previous article on Accenture, I stated that I was looking for $1.34 in earnings per share. Additionally, Accenture's management issued guidance of 6-8% revenue growth for FY 2017 and an earnings per share estimate of $5.70 to $5.87.
For FY 2017, Accenture has over 45% of its revenues coming from Digital, Cloud, and Security Services, which are high margin revenues for Accenture. Accenture spent $1.4B for share repurchases, and generated $1B in free cash flow so far. Accenture also announced $9.2B in new bookings in the most recent quarter. Table 1 below shows some metrics for Accenture going back 5 years.
Table 1 - Accenture's 5 Year Metrics
Table 1 shows that the metrics are fine in my opinion. Revenues, operating margins, net income, earnings per share, dividends, payout ratio, shares outstanding and return on assets are all trending in the right direction. As a person who intends on being a long term shareholder, I can't complain about the most recent numbers or the trends depicted in Table 1.
Since my last article, Accenture has been busy adding to its business portfolio. Just in the month of March, Accenture acquired several companies and opened several new offices, laboratories, and innovation centers. Accenture acquired Davies Consulting enhancing Accenture's capabilities in the utility industry. It acquired First Annapolis Consulting which is designed to expand Accenture's capabilities in the payments market. Accenture acquired Focus Group Europe which enhances Accenture's cloud strategy. It completed its acquisition of OCTO Technology, which will expand Accenture's digital services in France and it completed its acquisition of Seabury Group, enhancing its aviation consulting capabilities. Accenture opened three Liquid Studios; one in Latvia, one in Singapore, and one in Sydney. These Liquid Studios are essentially laboratories for rapid development of software and applications for businesses. Accenture has more than 30 of these studios worldwide.
Accenture also opened an office in Portland, Oregon and a new innovation center in New York for finance and risk innovation. Additionally, Accenture enhanced their alliances with SAP SE (SAP) and Microsoft (MSFT).
All of this activity I find to be positive for Accenture's long term competiveness. Accenture's management makes good use of its free cash flow to open new laboratories and to acquire new companies. These acquisitions enhance Accenture's capabilities in different industries or in different markets globally. By looking at the return on assets in Table 1, it appears that Accenture's management is skilled at identifying strategic assets to acquire and at not paying too much for those assets.
While I think Accenture had a good quarter and I appreciate their recent corporate activity, apparently Wall Street didn't appreciate the quarter as much as I did. Chart 1 below shows a daily chart of Accenture. Note that the earnings release was prior to the market opening on Thursday.
After the earnings announcement Accenture sold off almost 6% in the next two days. I think this sell off offers an opportunity for people to either initiate a position or to add to your position in Accenture.
In summary, Accenture's most recent quarter was a decent one in my opinion. Revenues and earnings per share increased. Free cash flow continued to accumulate and shares outstanding have been reduced. Additionally, Accenture continued to expand its capabilities and the markets it can serve. Wall Street's immediate reaction to Accenture's most recent quarterly report offers a buying opportunity for people who feel that Accenture has an excellent long term future. I may take advantage of the minor sell off to add to my position.
This article was written by
Analyst’s Disclosure: I am/we are long ACN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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Comments (15)
#1 Shares outstanding - ACN has used buybacks to take the share count from 727 million to 664 million in the past 5 years. Keep in mind at their IPO they issued 1 billion shares, so they have now removed 1/3 of the shares through buybacks. That is actually returning cash to shareholders rather than what most tech companies do which is to buy back shares and then hand those shares out to management and employees (a.k.a. employee comp expense).
#2 Revenue growth - watch the split between consulting and outsourcing revenue. Accenture tries to balance these two as outsourcing carries lower margins but steadier revenue. As long as revenue grows at a steady pace to GDP in their markets then they are making progress. Any recessions will be balanced out across countries. During global slowdowns, the outsourcing revenue provides a cushion to earnings.
#3 Earnings - I like to adjust currency impacts back out of earnings to watch what earnings are doing at the country level. Helps you watch if they are really maintaining their premium position in the market. For years IBM has 'bought' revenue by signing low margin contracts that then dogs earnings for years. I like the way Accenture walks away from deals that are not win-win with their customers.I am not much for pattern watching but I know others are. It is likely that the stock price is sensitive to the buybacks as there seems to be a rising stock price when they are likely doing the share buybacks. It is hard to say since they do not disclose when these buybacks occur and the actual buybacks are not really large enough to move the stock significantly. But momentum investors probably exaggerate the upward movement since we tend to see a price pull back after earnings If you want to lower your entry price I would suggest selling a 3 month duration put right after an earnings release price drop. You could approach that in a lower risk way by selling at the strike price and use the proceeds as your 'discount'. While folks say a naked put is high risk this is less risk (by the amount of the premium) than just buying the stock outright. Or a higher risk approach would be to sell a 4 month put after earnings release at the previous high. This is going to give you a lot of premium if the stock rises above its previous high and if it doesn't will give you a slightly smaller amount of discount that an ATM put would have.I'm long ACN in case you haven't noticed.
