Market Woes Bite Accenture, but Wound Isn't Fatal

Company says it's on the right track, despite financial services malaise.
Author:
Publish date:

SAN FRANCISCO --

Accenture's

(ACN) - Get Report

Chief Executive Bill Green is trying to help the consulting and outsourcing giant manage turbulent investor behavior that has capsized its stock in recent months.

Since early November, Accenture's shares have fallen along with those of tech goods makers that are struggling with weak sales to ailing financial services clients. This downdraft has erased the company's modest stock gains for the year, and left it performing worse than major market indices, including the

Dow Jones Industrials

,

S&P 500

and

Nasdaq Composite

, despite successive quarters of strong growth and cash generation.

To stanch further losses, Green has used conferences with analysts to reassure investors that the company's consulting services, which generate 60% of revenue, should withstand economic headwinds because they address long-term issues that companies can't avoid, like preparing for regulatory changes.

And Green's view has its supporters. Several analysts see the stock being unfairly punished amid the near-term concerns on how much the subprime crisis in the financial sector will spread to customers and business partners.

In a meeting on Nov. 14, Green brought out his A-Team executives to show that "we have people up on the bow of the ship that are reading what's happening in the market and that are making corrections and steering the ship in the right direction to avoid icebergs." He also stressed that the company draws clients from various industries besides financial services, such as energy, chemicals and the government.

Accenture's lackluster stock performance appears especially unreasonable in light of the company's 18% jump in annual revenue to $19.7 billion for the fiscal-year ending in August, not to mention $2.27 billion in free cash flow it generated and the $2.3 billion spent repurchasing shares. Accenture has also committed another $3 billion to buybacks and raised its dividend by 20%.

"Clearly the stock is trading on near-term psychology and not on longer-term value," said Eric Boyce, a portfolio manager with Hester Capital Management, which has amassed about 390,000 Accenture shares this year. Barring a severe economic downturn, Boyce thinks the stock could reach $48 within the next 12 to 24 months.

Analyst Dylan Cathers of Standard & Poor's echoed Boyce in blaming Accenture's stock woes, in part, on investors' tendency to shun companies whose customers include financial services firms.

"I think that the general malaise in the market has definitely hit Accenture," said Cathers. "It's a well-run company, extremely well-diversified, and has a solid balance sheet. We continue to see shares pull back from what we thought were attractive levels a couple of months ago."

But investors remain unconvinced that the company's exposure to financial services firms won't become a liability amid the mounting losses from mortgage-backed securities. Banks, insurers and other financial services firms accounted for 22% of Accenture's annual revenue and 20% of its operating profit, second only to telecom communications and high-tech firms.

During the November meeting with analysts, CEO Green yielded the floor to Pierre Nanterme, who leads Accenture's financial services practice. Nanterme said that he sees continuing demand from financial services firms to stitch together old IT systems, put new technology in place to reduce transaction costs for trading operations, and help wealth planners keep pace with the needs of affluent clients as the world's population ages.

Analysts have made the case that IT services firms should see demand increase, even from financial services firms, despite a broader economic slowdown as companies look for ways to cut costs.

This theme played out in

IBM's

(IBM) - Get Report

latest quarterly results. A shortfall in orders from financial services companies hit its hardware business while its services unit logged a standout performance.

Since then, India-based tech services giants

Infosys

(INFY) - Get Report

and

Cognizant

(CTSH) - Get Report

also posted strong revenue and earnings growth despite deriving 37% and 47% of revenue, respectively, from financial services firms.

Nonetheless, investors have unloaded shares of these companies without discriminating between their operating models, profitability or diversification.

One of Accenture's greatest strengths, say investors and analysts, is its exposure to markets overseas that are growing faster than the U.S. During the last fiscal year, the proportion of revenue coming from European, Middle-Eastern and Asian markets grew from 54% to 57%. That amount of international exposure tops rivals like

Computer Sciences

(CSC)

, for example, which receives just 41% of revenue from abroad.

What's more, Accenture derives more of its revenue from higher-margin consulting work than any of its rivals, and maintains a more attractive balance sheet. The company has $3.3 billion in cash, and just $2.5 million in long-term debt. Rival

ACS

(ACS)

has just $250 million in cash and nearly $2 billion in long-term debt, while Computer Sciences has about $1 billion in cash and $1.45 billion in long-term debt, according to recent securities filings.

Analysts, on average, expect Accenture's revenue to grow 15% in the current quarter and 11% for the year, vs. single-digit increases for its U.S.-based peers.

For these reasons, S&P's Dylan Cathers, who has a "buy" rating on Accenture, says the company merits a higher valuation than its rivals. Accenture's shares are trading at 15 times his earnings estimate for the next calendar year, vs. 11 to 12 times for ACS and

EDS

(EDS)

.

"If you think that the IT services sector is a good place to be investing, and you're looking for the company with the most solid footing, it's Accenture," says Cathers.