Accenture's ( ACN) stock took a tumble on Wednesday after it
reported a disappointing quarterly profit and one analyst subsequently downgraded the IT services firm. Shares of the company fell off $2.16 -- nearly 7% -- to $28.74 in recent trading. While Accenture beat the Street's earnings expectations and was generally in line with revenue predictions, analysts expressed concern over the company's contracts with the National Health Service in England, which was blamed for the decline in quarterly profit. The company made a $69.7 million profit, or 11 cents a share, a precipitous drop from the $209.8 million, or 35 cents a share, it made in the same quarter a year ago. Earnings included a charge for $450 million in future losses related to delays in implementing systems for NHS. Calling the NHS deals an "albatross around the firm's neck," Needham analyst Jonathan Maietta lowered his rating from buy to hold and wrote that "we expect 2007 losses associated with the NHS contracts to be $10 million to $20 million higher than the $140 million in losses we expect for 2006." He had expected the deal to become profitable in 2007. "We believe that Accenture will try to compensate for the losses by investing less in the business, which could have broader implications, such as reduced employee morale," Maietta wrote. Excluding these contracts, the business is performing well, he wrote, but that won't matter until Accenture restructures the NHS contracts or wins enough incremental business to offset the negative impact from the deals. Maietta trimmed his non-GAAP earnings estimate by 3 cents a share for the second half of fiscal 2006 and cut his 2007 earnings forecast by 4 cents a share to account for margin pressure brought on by the contracts. Needham does investment banking with Accenture.
Despite investors' unhappiness with the stock, other analysts agreed that the company is generally performing well. Moors & Cabot analyst Cindy Shaw noted that besides the UK NHS contract, "Accenture stated business has never been stronger," and raised estimates for fiscal-year 2006 EPS by a penny. Shaw also upped her expectations for the fourth quarter of fiscal 2007 by a penny to reflect a lower share count. The company's board authorized another $1.5 billion to buy back shares, bringing the current total to $2.5 billion, she noted. Accenture will repurchase the shares over the next 18 to 24 months. Shaw has a buy rating on the stock. Moors & Cabot does investment banking business with Accenture. Bernstein analyst Rod Bourgeois called the NHS "a disappointing surprise" but notes that "in actual net present value terms, the economic problem related to this NHS charge is costing Accenture less than $300 million (equivalent to 34 cents per share), which is minor relative to Accenture's overall market cap." He rates the company outperform, and noted that the "emotional reaction" to the stock is a buying opportunity. Bernstein doesn't have an investment banking relationship with Accenture.