The Accent Is on Solid Growth
01/06/2009 1:00 pm EST
Stephen Biggar, Standard & Poor’s global director of equity research, says consulting firm Accenture has a lot going for it during tough times.
Accenture (NYSE: ACN) is the largest independent information-technology outsourcing and consulting company in the world, with operations in 52 countries and reported net revenues of $23.4 billion in fiscal year 2008 (ended August).
We view Accenture as a one-stop-shop information technology (IT) services company. It is as adept, in our opinion, in providing infrastructure outsourcing or business process outsourcing as it is in management consulting for improving a client's customer-relationship management (CRM) processes or its overall business strategy. It also offers systems integration and technology consulting services.
Given Accenture's breadth of offerings and its broad geographic diversification, we think it is well-positioned to weather the current US recession and global economic slowdown.
We also have a favorable view of the company's balance sheet and cash flows. At the end of August 2008, Accenture had over $3.6 billion in cash, with a debt-to-total capital ratio of under 0.5%. Cash flow in fiscal 2008 was nearly $2.5 billion. The company's solid balance sheet gives it the financial flexibility to continue to repurchase shares and potentially make acquisitions, despite the economic downturn.
We view the shares as compellingly valued, recently trading at around $34, or 11.5x our calendar 2009 earnings per share estimate of $2.94, roughly in line with traditional IT outsourcing peers. We believe that a premium to peers is warranted, given our view of the solid revenue growth that the company has shown in its higher-margin consulting business, rising levels of bookings, and its solid balance sheet.
We believe Accenture is one of the few IT services providers that has the expertise, size, and scope to compete head to head with industry heavyweight International Business Machines (NYSE: IBM), while holding off challenges from lower-cost India-based providers.
We look for net revenue growth of about 8% in fiscal 2009, well below last year's 19% increase, which was aided by favorable foreign currency movements. Still, we think that the company is taking market share, as it is growing faster than the overall market. We look for operating margins of 13.5% in fiscal 2009, a slight increase over last year. The company's global delivery network has been partially responsible for its ability to deliver consistent value for its customers, as it is able to use exactly the right resource in the right place at the right price to service its clients.
We look for earnings per share of $2.87 in fiscal 2009 and $3.13 in fiscal 2010, after operating EPS of $2.70 in fiscal 2008.
We base our 12-month target price of $35 on a P/E of 11.9x our calendar 2009 earnings per share estimate. We also use a P/E-to-growth ratio of 0.74x, assuming a three-year earnings growth rate of 16%. The shares recently had an annual dividend yield of 1.7%.
The stock carries Standard & Poor's highest investment recommendation of five STARS, or Strong Buy.
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