Accenture Beats the Analysts: Is the Stock Still a Good Buy?

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Accenture (NYSE:ACN) is a world-renowned management firm. Its stock has been an incredible performer, up 50 percent in two years. The stock caught my eye after it beat on the top and bottom lines but issued guidance that was somewhat weak. In this article, I will cover the company’s recent performance and weigh in on the prospects for the stock going forward. For those who aren’t aware of this $50 billion company, it provides management consulting, technology, and business process outsourcing (BPO) services worldwide.

The company operates through Communications, Media & Technology, Financial Services, Health & Public Service, Products, and Resources segments. It offers management consulting services in the finance and enterprise performance, operations, risk management, sales and customer service, strategy, sustainability, and talent and organization management areas.

The company further offers system integration consulting services and solutions, including enterprise solutions and enterprise resource planning, industry and functional solutions, information management services, custom solutions, technology consulting services, and solutions comprising information technology strategy, infrastructure and IT security consulting, and application modernization and optimization. In addition, it provides technology outsourcing services, such as application outsourcing services and infrastructure outsourcing.

Further, the company provides BPO services for business functions and processes, including finance and accounting, human resources, learning and procurement, and others, as well as industry-specific BPO services, such as credit services.

It serves communications, electronics and high technology, media and entertainment, banking, capital markets, insurance, health, public service, airlines, freight and logistics, travel, automotive, consumer goods and service, industrial equipment, infrastructure and transportation service, life sciences, retail, chemical, energy, natural resources, and utility industries. It has its proverbial fingers in a lot of pies but continues to deliver and manages to grow. It is an impressive company.

The company’s year-over-year growth is enough to impress anyone on the Street. It saw net revenues of $7.74 billion in its latest quarter, an increase of 7 percent compared to the same period last year, and was way above the company’s guided range of $7.4 billion to $7.65 billion. Diluted earnings per share were $1.26, compared with $1.21 for the third quarter last year, which included a benefit of $50 million, or 7 cents per share, from a reduction in reorganization liabilities.

Excluding this benefit, diluted earnings per share for the third quarter last year were $1.14. Thus, you can see just how impressive the growth was for Accenture. Diluted earnings per share for the third quarter of fiscal 2014 increased 11 percent from adjusted earnings per share for the third quarter last year. Operating income for the quarter was $1.18 billion, or 15.2 percent of net revenues, compared with $1.14 billion, or 15.9 percent of net revenues, for the third quarter last year, which included the benefit of $50 million from the reduction in reorganization liabilities.

Excluding this benefit, operating income for the third quarter of fiscal 2013 was $1.09 billion, or 15.2 percent of net revenues. New bookings for the quarter were $8.8 billion, with consulting bookings of $4.3 billion and outsourcing bookings of $4.5 billion. The only real weakness I can find with the quarter was a slight reduction in gross margins.

Gross margin for the quarter was 32.8 percent, compared with 33.9 percent for the third quarter last year. Selling, general, and administrative expenses did rise, but were lower on a percent of sales basis. For the quarter they were $1.36 billion, or 17.5 percent of net revenues, compared with $1.35 billion, or 18.7 percent of net revenues, for the third quarter last year. The company really delivered.

Pierre Nanterme, Accenture’s chairman and CEO, said: “We are very pleased with our third-quarter financial results. We delivered strong revenue growth, which was broad-based across the different dimensions of our business, and earnings per share of $1.26, up 11 percent. New bookings of $8.8 billion bring us to $27.6 billion for the first three quarters of the year, and demonstrate that our services continue to be highly relevant to our clients.”

This stock is a buy, although there was some concern in pre-market trading regarding the guidance, which was a little weaker than I would have liked. Still, the company plans to provide growth. I am of the opinion that Accenture is going to under-promise and over-deliver. The outlook was strong but lower in some areas than previously stated. For fiscal 2014, the company now expects net revenue growth to be in the range of 4 percent to 5 percent, compared with 3 percent to 6 percent previously.

The company now expects diluted earnings per share to be in the range of $4.50 to $4.54, compared with $4.50 to $4.62 previously. Accenture further now expects operating margin for the full fiscal year to be 14.3 percent, a 10 basis point expansion from the adjusted Non-GAAP operating margin of 14.2 percent for fiscal 2013. The company previously expected an operating margin for fiscal 2014 of 14.3 percent to 14.5 percent, so that is a plus. The earnings reduction is certainly disappointing, but I would not let that detract from my buy rating. The stock is going higher, and the company will continue to deliver.

Disclosure: Christopher F. Davis is long Accenture. He has a buy rating on the stock and a $96 price target. 

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