In the latest earnings call, Accenture Plc (NYSE:ACN) gave poor guidance, causing the stock price to fall 10%. Accenture is now trading at roughly $72 per share. Negative momentum may have improved in the short run, but considering this is one of the best consulting companies in the industry with a strong share- repurchase program in motion, high revenue growth in China and India, and excellent relations with most Fortune 500 companies, the 10% pullback on June 28 may be an opportunity to buy Accenture. This may be a great company with a bad stock.
What’s wrong with Accenture?
The company just said that this year will be tough. Fiscal 2013 revenue guidance was reduced to 3% to 4% growth. The company seems to be particularly weak in Brazil and Europe. Overall, it expects $400 million more in small consulting- booking contracts (which become revenue faster due to their size), and many clients are slowing the pace and level of spending per arrangements they had with Accenture Plc (NYSE:ACN).
I suspect that a bad macroeconomic environment was one of the reasons for Accenture’s lower-than-expected performance this year, because the earnings call also showed us that Accenture Plc (NYSE:ACN) is doing quite well in countries like China, India and the U.S., where it experienced double-digit growth.
This is not necessarily a downside, as Accenture can adjust quickly to changes in the macroeconomic environment. I will explain more about the relationship between Accenture and macroeconomics later.
Revenue may be down, but profitability isn’t
The good news is that Accenture Plc (NYSE:ACN)’s profitability actually increased. Pierre Nanterme, Accenture’s chairman and CEO, said:
We delivered very good profitability, with operating margin expansion and EPS growth reflecting the disciplined management of our business… Our balance sheet remains very strong, with a cash balance of $5.9 billion, and we generated $1.4 billion in free cash flow for the quarter.
Indeed, Accenture’s EPS for this quarter is $1.21, compared with $1.03 for the third quarter of last year. Of the $0.18 in additional EPS, only $0.03 is related to higher revenue and operating results. Most of the reduction is related to reorganization liabilities and better tax rates. There is also a $0.02 effect coming from share repurchases.
As you can see, it’s good management that is making profitability increase, and not revenue. So, as Accenture benefits from a better macroeconomic environment in the next quarters, I expect profitability to increase even faster.
I expect share repurchases to continue raising EPS artificially in the future, as Accenture’s showing commitment to use most of its free cash flow either in share repurchases or paying dividends. Of the $1.4 billion in free cash flow that the company generated, $618 million was used for share repurchases and $562 million for the second biannual dividend payment.