Accenture (ACN), a provider of management consulting, technology and outsourcing services, is expected to report its fourth quarter financial results today after close of the market.
Accenture is a proven mover and successful master at comebacks. It has delivered 14.8% annualized returns over the past ten years and expectations for this quarter look quite positive.
Evidence of endurability is apparent when viewing the most recent quarterly report which was savaged so badly that the stock price fell dramatically, but ACN has made a remarkable recovery in a short period of time.
Even so, there are still two areas of concern that may affect the outcome of Accenture’s earnings report in a negative way – cross-over of the 50 and 200-Day Moving Averages and the challenging macroeconomic environment which has been constricting spending from clients.
Earnings Look Favorable
The previous earnings looked quite okay, with earnings rising 17%, margins expanding, and operating cash flow rising nearly 24% year-over-year, but still suffered investor mauling, which is quite baffling!
Accenture’s drop was due mainly to its reported revenue that fell well short of expectations. This report not only sent its own shares down but also pulled down rivals International Business Machines (IBM) and Cognizant Technology Solutions (CTSH) with it.
This dilemma becomes even more apparent when viewing ACN’s balance sheet which now sports nearly $6 billion in cash and plenty of free cash flow.
It is expected, by Wall Street analysts, that ACN will report earnings of $1.00 a share, and the consensus estimate implies 13.60% growth from last year’s 88 cents a share. For the full year, ACN is expected to have earnings of $4.20 a share on revenue of $28.49 billion.
There are several positive factors affecting this quarter’s results:
- Increasing focus on the outsourcing business,
- operating cost optimization,
- new bookings, and
- continued return to shareholders.
Analysts have projected revenue will have increased year-over-year to $6.90 billion for the quarter, and for the year revenue is projected to come in at $28.49 billion.
Over the last four quarters, the company’s income rose by an average of 29% year-over-year. The largest growth was in the second quarter, when income climbed 71% year-over-year.
Accenture’s consulting services represent nearly 53% of its revenue while outsourcing services represent the rest.
Growth of ACN
Accenture management has been quite clever with its growth tactics and has moved into niche areas of importance for their business.
Here are several examples where ACN has or is benefiting:
- In India, ACN has established a sound base which will, in time, allow it to expand to other areas of Asia with less cost and greater ease. It is not as large as Infosys (INFY), the local domestic company, but has seen substantial growth in the health and public services business.
- Expansion of its U.S. defense health market by completing its acquisition of ASM Research. This acquisition will allow Accenture to expand the offerings and value it provides to U.S. Department of Defense and Veterans Affairs.
- Accenture was selected to help build and launch a new mobile platform for Belgacom (BGAOY) the largest telecommunications company in Belgium, and BNP Paribas Fortis, one of the country’s leading banks, who are jointly working to develop a mobile commerce “ecosystem” for Belgian merchants and consumers to enable seamless and secure shopping and payments via smartphones.
Also, there is plenty of loyalty to Accenture from shareholders due to its sound financial footing producing big stock repurchases and rapid dividend growth.
The Cross-Over Concern
Accenture, from a technical perspective, is suffering from an unfavorable trend on the moving average crossover front. Recently, the 50 Day Moving Average for ACN broke out below the 200 Day Simple Moving Average, which suggests short-term bearishness — a major reason for the two-part strategy!
The stock’s 50-day moving average is $73.97 whilst the 200-day moving average is $75.17.
Analysts Anticipate Continued Upward Momentum
Overall, ACN has been the subject of a number of recent bullish research reports:
- Analysts at Robert W. Baird reiterated a “buy” rating and have an $86.00 price target on the stock.
- UBS AG raised their price target on ACN shares from $77.00 to $80.00 with a “neutral” rating on the stock.
- However, analysts at Susquehanna cut their price target from $88.00 to $85.00 but have a “positive” rating on the stock.
Overall, a buy rating on ACN is dominant.
Hedge Funds Back ACN
At the end of second quarter hedge funds were bullish in ACN stock. An “upper tier” of noteworthy hedge fund managers who were boosting their holdings considerably are:
- Lansdowne Partners holds the largest position in Accenture, with a $582.3 million position in the stock, comprising 7.3% of its 13F portfolio.
- AQR Capital Management held a $100.8 million position; the fund has 0.4% of its 13F portfolio invested in the stock.
- Other hedgies with similar optimism include Adage Capital Management, Winton Capital Management and Wallace R. Weitz & Co.
Accenture should produce a positive earnings report, therefore, take advantage of the following options strategies:
Due to the uncertainty created by the cross-over of the 50-Day and 200-Day Moving Averages it is recommended that the following put option be employed to cover any loss from the call option.
OPTIONS TRADE 1: Buy the ACN Oct 2013 70.000 put (ACN131004P00070000) at or under $0.30, good for the day. Place a protective stop limit at $0.10 and a pre-determined sell at $1.65.
This trade will cover any loss incurred from the call option as well as the cost of the put option if ACN’s earnings should negatively surprise.
This is the expected result from ACN providing for a 50% profit from the call option.
OPTIONS TRADE: Buy the ACN Feb 2014 80.000 call (ACN140222C00080000) at or under $2.25, good for the day. Place a protective stop limit at $0.90 and a pre-determined sell at $3.70.
This trade allows for a 50% profit plus the cost of the options put.
As of this writing, Ian Harvey did not hold a position in any of the aforementioned securities. Visit his site, stock-options-made-easy.com, for a wealth of information that will help you benefit from the exciting and lucrative world of options trading.