Marcial: A Positive Accent on Accenture

Accenture's shares have tumbled amid the global economic downturn, but that just makes the consulting and outsourcing outfit look like a bargain

By Gene Marcial

BW's Gene Marcial

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Influential hedge fund manager George Soros cast a negative spell on the stock market on Apr. 7, asserting that the rally in the past four weeks was bound to sputter and fail. That partly caused all the broad indexes to retreat by more than 2% that day. But for investors who had missed the market's surprising 25% advance in prior weeks, the pause gave them another chance to snap up stocks on their wish lists at lower prices.

One of the investment managers who did was Stanley A. Nabi, vice-chairman and chief investment officer at Silvercrest Asset Management Group, who predicts the market will trade higher this year. "I feel absolutely like a kid in a candy store, with so many values to pick at great bargains," says Nabi. Over the long term, he isn't so sanguine because of what he sees as unwelcome fiscal consequences resulting from the Obama Administration's plans to stabilize the financial system.

Nonetheless, the market's retreat encouraged him to buy more shares of his top pick: Accenture (ACN), a global leader in management and technology consulting and outsourcing services, whose stock has tumbled from 43 on Sept. 19, 2008, to 27 on Apr. 7. Part of the stock's recent decline was due to the company's disappointing fiscal second-quarter results announced on Mar. 26, a result of the worldwide economic downturn, the impact of a stronger dollar (over 50% of revenues come from overseas), and higher tax rates.

Nabi figured that based on its robust balance sheet (with debt of just $1.5 million and cash on hand of $3 billion), strong free-cash-flow generation, and a depressed stock valuation, Accenture has become even more enticing. Moreover, he says, the company's steady repurchase of its own shares reflects management's confidence in the company's prospects. Nabi forecasts earnings of $2.65 a share in fiscal 2009 (ending Aug. 30) and $2.75 in fiscal 2010. "Based on fundamentals, Accenture is a bulletproof investment," says Nabi.

Diversified Operations

Given the weakened global economy, analysts had expected some decline in parts of Accenture's businesses. "We are clearly seeing a slowdown in overall info-tech spending, which is likely to persist in the coming quarters," notes analyst Dylan Cathers of Standard & Poor's. (S&P, like BusinessWeek, is owned by The McGraw-Hill Cos. (MHP).) Even so, he has maintained his strong buy recommendation on the stock, with a 12-month target of 33. "We believe there will be select areas of strength as companies look for ways to quickly lower their cost bases," he says.

Cathers concedes that the near-term period will be challenging but expresses confidence that Accenture's diversified operations give it an edge on its competitors. The company, operating in 48 countries, helps its clients identify new businesses and technology trends, and develops plans to increase their revenues, gain new markets, and deliver their products more efficiently. Its clients include plenty of blue-chip corporations worldwide.

The shortfall in its second-quarter results, including its consulting business, prompted Accenture to scale back its sales and earnings forecasts. Despite the reduction in its guidance, however, Accenture still believes it can generate 2009 operating margins within the range of 13.4% to 13.7%, in line with management's previous guidance.

Dividend Hike Expected

Analyst Bryan Keane of investment bank Credit Suisse (CS), who rates the stock outperform, also reduced his sales and earnings estimates. One positive note that he sees: The company may increase its dividend in the summer. "We would not be surprised to see a considerable dividend increase," says Keane, whose 12-month price target for the stock is 42, a bit higher than other analysts. (Credit Suisse has done banking for Accenture.)

The Street analysts who track Accenture were not really jolted by the disappointing second-quarter results. None of the 25 analysts who track the company recommends selling the stock. Fourteen rate Accenture a buy, and nine tag it a hold.

With most investors still playing a defensive strategy in the market, Nabi thinks Accenture, with its global businesses, strong cash flow, and sterling balance sheet has become an irresistible buy.

Marcial writes the Inside Wall Street column for BusinessWeek. In 2008, FT Press published the book Gene Marcial's 7 Commandments of Stock Investing.