Earnings Analysis: Accenture

| About: Accenture plc (ACN)
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Accenture PLC (NYSE:ACN) recently reported its preliminary financial results based on which we provide a peer-based analysis of the company.

Accenture PLC's analysis versus peers uses the following peer-set: IBM Corp. (NYSE:IBM), SAP AG ADS (NYSE:SAP), Infosys Ltd. ADR (NASDAQ:INFY), Wipro Ltd. ADS (NYSE:WIT), Cognizant Technology Solutions Corp. (NASDAQ:CTSH), Capgemini (CAP) and Computer Sciences Corp. (CSC). The table below shows the preliminary results along with the recent trend for revenues, net income and returns.

Annual (USD million) 2012-08-31 2011-08-31 2010-08-31 2009-08-31 2008-08-31
Revenues 29,778.0 27,352.9 23,094.1 23,171.0 25,313.8
Revenue Growth % 8.9 18.4 (0.3) (8.5) 18.0
Net Income 2,553.5 2,277.7 1,780.7 1,590.0 1,691.8
Net Income Growth % 12.1 27.9 12.0 (6.0) 36.1
Net Margin % 8.6 8.3 7.7 6.9 6.7
ROE % 63.6 67.8 62.2 58.6 73.5
ROA % 15.8 15.9 14.2 12.9 14.6

Valuation Drivers

Accenture PLC's current Price/Book of 11.5 is about median in its peer group. Accenture PLC's operating performance is higher than the median of its chosen peers (ROE of 63.6% compared to the peer median ROE of 26.3%) but the market does not seem to expect higher growth relative to peers (PE of 18.2 compared to peer median of 17.7) but simply to maintain its relatively high rates of return.

The company's net profit margins have been relatively poor (currently 8.6% vs. peer median of 14.5%) while its asset efficiency is better than the median (asset turns of 1.8x compared to peer median of 1.0x). This suggests a volume driven operating model relative to its peers. Accenture PLC's net margin is its highest relative to the last five years and compares to a low of 5.8% in 2007.

Economic Moat

The company's top line performance is not as good as its peers (year-on-year change in revenue is 8.9%) but its earnings performance (12.1% change year-on-year) has been similar to the peer median. Unless the company maintains or improves this relative earnings growth, it is in danger of lagging its peers. Accenture PLC currently converts every 1% of change in revenue into 1.4% of change in annual reported earnings.

Accenture PLC's return on assets currently is around peer median (15.8% vs. peer median 15.0%) -- similar to its returns over the past five years (14.7% vs. peer median 14.8%). This performance suggests that the company has no specific competitive advantages relative to its peers.

The company's gross margin of 32.2% is around peer median suggesting that Accenture PLC's operations do not benefit from any differentiating pricing advantage. In addition, Accenture PLC's pre-tax margin is less than the peer median (13.1% compared to 18.7%) suggesting relatively high operating costs.

Growth And Investment Strategy

While Accenture PLC's revenues have grown faster than the peer median (8.7% vs. 7.1% respectively for the past three years), the market gives the stock an about peer median PE ratio of 18.2. This suggests that the market has some questions about the company's long-term strategy.

Accenture PLC's annualized rate of change in capital of 12.8% over the past three years is around the same as its peer median of 15.6%. This investment has generated a better than peer median return on capital of 64.5% averaged over the same three years. The greater than peer median rate of return suggest that the company may be under investing in growth.

Earnings Quality

Accenture PLC reported relatively weak net income margins for the last twelve months (8.6% vs. peer median of 14.5%). This weak margin performance and relatively conservative accrual policy (5.7% vs. peer median of 1.8%) suggest the company might likely be understating its net income, possibly to the extent that there might even be some sandbagging of the reported net income numbers.

Accenture PLC's accruals over the last twelve months are positive suggesting a buildup of reserves. In addition, the level of accrual is greater than the peer median -- which suggests a relatively strong buildup in reserves compared to its peers.

Trend Charts

Company Profile

Accenture Plc operates as an investment holding company with interest in providing management consulting, technology and outsourcing services. The company's business is structured around five operating groups, which together comprise nineteen industry groups serving clients in major industries around the world, namely, communications and high tech, financial services, health and public service, products and Rresources. The company was founded in 1989 and is headquartered in Dublin, Ireland.


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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.