On top of organic growth, Corporate Executive Board also acquired SHL, a U.K. based provider of cloud-based talent measurement and management solutions in August 2012. Given that it is much easier to sell new products to existing customers than win new customers, Corporate Executive Board is currently cross-selling SHL’s assessment and talent analytics products to its members which are not currently clients of SHL.
I am cautious on Booz Allen Hamilton, considering its reliance on the U.S. government and its agencies as its major client. Federal agencies are typically perceived as good customers given a steady pipeline of contracts and limited credit risk. However, it remains to be seen if government contractors like Booz Allen Hamilton will benefit or suffer from austerity measures by the U.S. government. Competition for fewer dollars might favor bigger players like Booz Allen Hamilton, but I am of the view that the overall reduction in government work might be a bigger factor. Booz Allen Hamilton’s fiscal 2013 (year ended March) revenues were down 1.7% from fiscal 2012 and management is guiding for a low single digit decline in full fiscal year 2014. This echoes my view that the impact of austerity measures will be negative for Booz Allen Hamilton.
At its second quarter fiscal 2013 earnings call, Accenture guided lower for full year fiscal 2013 revenue, expecting revenue growth to be in the lower half of its previously guided 5%-8% in local currency terms. Management attributed the lower guidance to weaker than expected performance for its Europe consulting business. I am negative on Accenture, given that it generates more than half of its revenues from the consulting segment. The consulting segment is more cyclical than its technology and business process outsourcing divisions. Consulting contracts are typically one-off transactions and are more likely to be terminated in the event of a downturn.
Although The Corporate Executive Board Company (NYSE:CEB) trades at a premium to its other consulting firm peers with a forward P/E of 18.4, I think this is justified given the attractive economics of its business model. Revenue from new customers flows straight down to the earnings for The Corporate Executive Board Company (NYSE:CEB). In comparison, consulting firms need to hire more staff if there is an increase in consulting assignments, or raise salaries to retain the most outstanding employees to maintain the value of their strategic input.
Mark Lin has no position in any stocks mentioned. The Motley Fool recommends Accenture.
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