Friday, September 09, 2011

Accenture Could Add To Your Net Worth

Arthur Andersen went away in the wake of its client, Enron's, bankruptcy. But before that, its consulting unit, Andersen Consulting, was spun off. Once that Andersen name was tainted, Andersen Consulting became Accenture and it went public in July 2001. Since then, the stock has risen 248% to $52.17. Does it have further to rise?

Accenture has been hitting the cover off the ball when it comes to earnings. In June, Accenture reported third quarter 2011 EPS of 93 cents that beat the Zacks Consensus Estimate by four cents. Its earnings were 25% above those of the year before. Accenture's revenue of $6.72 billion was 20.6% higher than the year before and nearly $500 million more than Zacks Consensus Estimate.

And Accenture was optimistic about its future back in June. For its fiscal 2011, Accenture raised its revenue growth guidance to a range between 14% and 15% -- above its previous range between 11% and 14%. And Accenture boosted its EPS guidance to between $3.36 and $3.40 from an earlier guided range of $3.22 to $3.30. The new guidance is between 9 and 13 cents above the Zacks Consensus Estimate of $3.27.

Is all this good news enough to justify an investment in Accenture stock? Here are three reasons in favor:
  • Excellent earnings reports. Accenture has been able beat analyst’s expectations in all of its last five earnings reports.
  • Rising sales and profits and cash-rich balance sheet. Accenture sales and profits have both climbed. Its revenue rose at a 6.1% annual rate from $18.2 billion (2006) to $23.1 billion (2010) while its net income increased at a 16.6% rate from $973 million (2006) to $1.8 billion (2010) — yielding a solid 8% net profit margin. It has a mere $1 million in debt and its cash grew at a 9% annual rate from $3.4 billion (2006) to $4.8 billion (2007).
  • Out-earning its cost of capital. Accenture is earning more than its cost of capital – and it’s making progress. How so? It’s producing positive EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In the first nine months of 2011, Accenture's EVA momentum was 1%, based on nine months annualized 2010 revenue of $23 billion, and EVA that improved from 2010's nine months annualized $2.4 billion to 2011's nine months annualized $1.7 billion, using a 10% weighted average cost of capital.
One reason against:
  • Fairly high valuation. Accenture's price-to-earnings-to-growth ratio of 1.39(where a PEG of 1.0 is considered fairly priced) means its stock price is fairly expensive. It currently has a P/E of 16.5, and its earnings per share are expected to grow 11.9% to $3.78 in fiscal 2012.
Accenture stock has come off its all-time high of $63.43 in July 2011. But to make it a screaming buy, it would need to drop further -- possibly below $40. Given the volatility in the market these days, it would be worth waiting to pick Accenture up at a lower price.


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