Should I Buy Accenture? 3 Pros, 3 Cons

by Will Ashworth | July 1, 2013 2:34 pm

Should I Buy Accenture? 3 Pros, 3 Cons

Last week, the S&P 500 capped its best first half since 1998. Unfortunately for Accenture (ACN[1]), it couldn’t say anything close to the same.

The world’s second-largest technology consultant announced its fourth-quarter revenue wouldn’t be nearly as strong[2] as analysts were expecting, and its stock dropped roughly 10% in response, closing well off its 52-week high around $84.

The question is, was ACN’s plummet a warning, or an opportunity? To see whether you should buy Accenture right now, let’s look at the pros and cons of the stock:

Pros

Operating Income: Despite revenues increasing by just 3% in Q3, Accenture’s operating margin improved 110 basis points year-over-year to 15.9%, resulting in a 7.6% increase in operating profits to $1.41 billion. Both its operating margin and operating income in the third quarter were corporate records. Excluding reorganization benefits, ACN expects its fiscal 2013 operating margin to be between 14.2% and 14.3% — an improvement of at least 30 basis points over 2012. So despite having some difficulties nailing down revenue, Accenture is having no such problem with profitability.

Cash Flow: Probably Accenture’s strongest attribute is its ability to generate free cash flow. In 2013, it expects to spend $400 million on property and equipment, leaving it with at least $2.7 billion in free cash flow combined with approximately $5.9 billion in cash. That means ACN has $8.4 billion it can use on dividends, share repurchases and acquisitions. Following Friday’s drop in price, Accenture’s free cash flow yield sits at 5.3% — about 190 basis points lower than IBM’s (IBM[3]) at 7.2%. With no debt to worry about, Accenture is as solid as they come financially.

Share Repurchases: Accenture bought back 7.8 million of its shares for $618 million in Q3, has repurchased 19.8 million shares for a total cost of $1.4 billion YTD, and expects to reduce its share count by 2% by the end of the fiscal year. And since FY2004, Accenture has reduced its share count by 28%. Between dividends and share repurchases, ACN will return $3.3 billion to shareholders in fiscal 2013 — and considering that the company has averaged $2.9 billion annually in shareholder rewards in the past three years, it seems Accenture is content to put more money in the pockets of investors in the years to come.

Cons

Booking Conversions: Where Accenture’s having a really tough time is converting some of its larger deals from bookings to actual projects. Furthermore, its clients are slowing the pace at which they spend on projects already underway. Fortunately, the company hasn’t suffered any major cancellations of bookings, which indicates that revenues are still in the pipeline … just slower to be booked. In addition, ACN’s smaller contracts, which tend to convert to revenue faster, saw a decline in numbers in Q3. Revenue certainty does not appear to be in the cards for the remainder of this fiscal year and into 2014.

Resources: As commodity prices continue to flatten or decline, Accenture’s resources segment continues to suffer from shrinking revenues. In the third quarter, its revenue in local currency lost 3% year-over-year to $1.28 billion, and its operating income was off by 16.5% to $212.4 million on a non-GAAP basis. Its operating margin in the quarter dropped 200 basis points to 17%, one of only two segments (five in total) to experience a contraction. With the resource market softening, the level of competition for contracts has intensified putting significant pressure on pricing. I wouldn’t expect that to change anytime soon.

Dividends: Given its ample amount of cash, income investors have to be a little disappointed in Accenture’s $1.62 annual payout. While the company was busy repurchasing $6.34 billion worth of shares in the past three years, it paid out just $2.42 billion in dividends. If ACN would have cut its share repurchases by $2 billion over the past three years and put those funds into dividends, it could’ve paid out an additional 93 cents annually for a dividend yield of 3.5%, or 120 basis points higher. As it stands now, Accenture’s 34% payout ratio is far too conservative.

Verdict

Accenture describes itself as a portfolio of businesses where several segments are firing on all cylinders while some others (resources, communications and media) aren’t. Diversification is the key to its success. During the past decade, its stock has seen just two years of negative total returns, and in both cases they were single-digit losses.

While there might be some revenue questions moving forward, Accenture is a very nimble (not to mention profitable) company. Its Friday decline appears to have simply provided investors with a better entry point.

So should you buy Accenture? Yes — and I’d hurry, because it will be back above $80 before you know it.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

Endnotes:
  1. ACN: http://studio-5.financialcontent.com/investplace/quote?Symbol=ACN
  2. fourth-quarter revenue wouldn’t be nearly as strong: http://finance.yahoo.com/news/accenture-reports-third-quarter-fiscal-200100625.html
  3. IBM: http://studio-5.financialcontent.com/investplace/quote?Symbol=IBM

Source URL: http://investorplace.com/2013/07/should-i-buy-accenture-3-pros-3-cons/
Short URL: http://invstplc.com/1ftsY2E