Recently, Accenture Plc (NYSE:ACN) dropped as much as 10.30% in a single day to $71.96 per share. The drop was due to its sluggish third-quarter revenue and lower outlook for the full year. Since the beginning of the year, Accenture Plc (NYSE:ACN), with a gain of just 8.2%, has lagged the S&P 500’s return of 12.6%. Should investors consider the recent plunge in its share price as a buying opportunity? Let’s take a closer look.
Accenture missed revenue estimates and lowered full year guidance
Accenture Plc (NYSE:ACN) operates in five main business segments: Communications, Media & Technology, Financial Services, Health & Public Service, Products and Resources. In the third quarter of 2013, most of its operating income, $275.7 million, was generated from the Financial Services segment. The Products segment ranked second with nearly $264 million in profits. In Q3 2013, the Financial Services segment enjoyed the highest operating margin of 18% while the Resources segment had the second highest margin at 17%. The Products segment’s operating margin was 15%.
In the third quarter this year, Accenture Plc (NYSE:ACN) experienced just a 1% increase (in U.S. dollar terms) in revenue to $7.2 billion, a bit lower than the company’s previous guidance range of $7.25 billion to $7.50 billion. It was also lower than the average analysts’ revenue estimates of around $7.42 billion. Its adjusted EPS, excluding a $0.07 benefit from reorganization, came in at $1.14, slightly higher than analysts’ expectation of $1.13 per share.
What I am interested in is Accenture Plc (NYSE:ACN)’s share buyback activity. During the third quarter, the company redeemed 7.8 million shares worth $618 million. Since the beginning of the fiscal year 2013, the company has retired 19.8 million shares on the market with a total investment of $1.4 billion. Even with the lower-than-expected revenue, Pierre Nanterme, the company’s Chairman and CEO was bullish about its profitability, operating margin expansion, EPS growth, and a strong balance sheet. He mentioned that the company has generated $1.4 billion in free cash flow for the quarter and has a cash balance of $5.9 billion.
For the full year, Accenture Plc (NYSE:ACN) lowered its revenue guidance from a range of 5%-8% to only 3%-4% in local currency. Its diluted EPS for the full year was also being adjusted from $4.89-$4.97 range to a range of $4.90-$4.94. At around $72 per share, Accenture is worth nearly $46.9 billion on the market. The market values Accenture at 9.4 times its trailing EBITDA (earnings before interest, taxes, depreciation, and amortization).
IBM: Lower valuation with $70 billion in cash return
Compared to its much bigger peer, International Business Machines Corp. (NYSE:IBM), Accenture still has a much higher valuation. The market values International Business Machines Corp. (NYSE:IBM) at 8.84 times its trailing EBITDA. Because of a sluggish operating performance at Accenture, IBM also declined 2.3%. International Business Machines Corp. (NYSE:IBM) has been expanding its footprint in growth markets such as business analytics and cloud computing, and is also entering new markets. In the past twelve years, International Business Machines Corp. (NYSE:IBM) has successfully expanded in the software field.
The software revenue as a percentage of operating income has increased from 27% in 2000 to 45% in 2012. In 2015, the company expects that 50% of revenue would come from the software segment. What might make investors interested is its good use of cash. Since 2000, IBM has used as much as $237 billion to grow the business and return cash to investors. Around $123 billion was used for share repurchases and $26 billion was used for dividend payments. In the next two years, International Business Machines Corp. (NYSE:IBM) is expected to return an additional $70 billion, including $50 billion in share buybacks and $20 billion in dividends.