Accenture Ascending Ahead of Earnings, Shares Still Undervalued

 

NEW YORK (TheStreet) -- Accenture  (ACN) will report fiscal third-quarter earnings Thursday before the opening bell. Although the enterprise IT consulting space has become more competitive, spurred by the rise of rival Cognizant  (CTSH) (stock is up 20%), it's tough to see how Accenture's own hot streak -- resulting in 10% stock gains -- will diminish.


The company remains an industry leader.

Not only has Accenture found ways to capitalize on higher-than-expected demand for its technology services, the Dublin, Ireland-based company has become more creative in its pricing strategy. This has enabled Accenture to deliver services at lower cost without sacrificing margins. 

The outlook for increased revenue and profitability looks bright. 

Broadly known for its global IT consulting expertise, Accenture is diversifying its business into high-growth, high-margin areas like strategic advertising and marketing. These areas will see significant growth opportunities in the next couple of years.

The market for digital marketing is projected to grow to over $43 billion in the next two years, nearly doubling what it was in 2013. The demand will be driven by the need of business to extract better returns on their marketing investments. Businesses with large marketing budgets will need better ways to reach their target audience, especially in a world where consumers prefer personalized content on all their devices.

What's more, by the year 2020, roughly $103 billion will be spent on search marketing, display advertising, social media marketing and email marketing, says Forrester. Accenture's marketing capabilities will work well for shareholders, who have already been buoyed by its recent deals for Agilex Technologies, a privately-held company that specializes in digital solutions and IT services.

This explains why Accenture shares are trading at near all-time highs of around $97 and are up more than 8% so far in 2015, besting the S&P 500 (SPX) index. This comes after investors suffered through a tough 2014 with the stock gaining less than 1%.

Though Accenture shares may not appear in the value bin, it does not make sense to part with a market leader solely based on price, especially when the company is growing into promising businesses.

Investors would be better served focusing on the value Accenture is creating.

Indeed, Accenture has been separating itself from the rest of the IT consulting pack, which includes competitors like IBM  (IBM) and Infosys  (INFY).

For the quarter ended May, earnings are projected to be $1.22 a share, down 3% year over year, while revenue is expected to be $7.55 billion, down 2.5%. For the full year ending August, earnings are projected to climb 4.6%% to $4.73 a share, while revenue of $30.51 billion would mark a 2% year-over-year increase.

With Accenture growing its capabilities in strategic marketing, there is still tons of value in Accenture shares. Based on fiscal 2016 earnings estimates of $5.15 a share, which puts Accenture stock at a P/E of 18, these shares should reach $115 in the next 12 t 18 months, delivering 20% gains.

This article is commentary by an independent contributor. At the time of publication, the author held no shares in any of the stocks mentioned.

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