Shares of consulting and outsourcing bellwether
rose sharply Friday, a day after it reported strong
fourth-quarter financial results and made bullish comments about the year ahead.
Shaking off concerns about a slowing U.S. economy, Accenture's forecast hit several key themes on investors' minds and underscored the company's profile as a large-cap growth stock.
And despite a decrease in operating and free cash flow, Accenture added 20% to its annual dividend, signaling confidence in its future ability to generate cash.
"Accenture happens to be one of the best cash-flow stories in the whole sector," said Eric Boyce, portfolio manager for Hester Capital Management. "That's one of the big reasons we own the stock."
Shares were recently trading up $2.10, more than 5.5%, to $40.12, despite a downdraft in the broader market indices.
Accenture's cash flow strength stems largely from its wide profit margins. The company derives nearly 60% of its revenue from consulting contracts that have higher margins than outsourcing.
During the conference call late Thursday, Chief Executive Bill Green also said that pushing through price increases is at the "top of the list in terms of margin expansion."
At the same time, employees in low-cost locations are shouldering more project work and administrative tasks. This helped Accenture pare operating costs as a portion of revenue in the year.
Green and his executive team tried to stanch any concerns that the company's consulting work might suffer if the economy slows or if one of its key customer segments -- namely financial services -- takes a hit from the credit market turmoil.
Chief Operating Officer Steve Rohleder said that the problems in the subprime mortgage market have had no impact on operations.
Consulting and tech services companies like Accenture are fighting the perception that their business would take a hit if the embattled investment banks and financial services firms cut back on IT spending and consulting projects.
But Accenture executives on the call said its growing base of clients overseas has boosted the company's consulting business while reducing exposure to the slowing U.S. market.
On the conference call, Rohleder said that Europe, the Middle East and Asia contributed the most to gains in Accenture's high-tech, communications and financial services business. Together, revenue from these sectors grew 19% and accounted for 46% of total sales.
In the fourth quarter, revenue surged 48% in Asia-Pacific and 39% in Europe, the Middle East and Africa. By contrast, revenue in the America's grew by a tepid 11%.
"We got what we were looking for with currency contribution from international exposure and their multiple product lines," says Tony Trzcinka, portfolio manager for Pax World. "The world is growing faster than the U.S., and Accenture has the global scope to take advantage of that."
Despite the bullish talk about the fourth-quarter and year-end results, Accenture's management seemed to be tempering investor expectations in case a U.S. economic slowdown takes hold. The company didn't specify whether its forecast of 9%-12% annual revenue growth includes currency effects.
The cascading value of the dollar against the European, Asian and Canadian currencies can mask a slowdown in demand. In the fourth quarter, for example, revenue grew 29% in dollar terms but only 23% in local currency terms.
Management also seemed defensive that its ratio of consulting work to outsourcing work would remain unchanged in the near term. Some investors had expected the ratio to shift in favor of outsourcing contracts that provide stability and reliable recurring revenue, albeit at the expense of some margin growth.
CEO Green said that Accenture's consulting work helps companies deal with long-term strategic issues like complying with regulatory mandates. These projects, said Green, are less susceptible to fluctuations in the economy and therefore less discretionary.
"I'm skeptical about that," says Pax's Trzcinka, referring to the claim that little of Accenture's consulting work is discretionary. "I think it's higher than what they claimed. Traditionally, consulting has been more cyclical and slows down in tough times."