Accenture: The Positive


By Margaret Popper One industry that seems to have been hit hard by the near-disappearance of business spending over the past year is management consulting. Like advertising, consulting is one of the first areas to feel the ax when corporations cut costs.

Coming on the heels of several years of Internet-fueled record growth, this downturn has been felt more acutely than preceding ones. "The rate of decline of consulting business was probably worse in the past 18 months than it was in past slowdowns," observes Adam Frisch, an analyst at UBS Warburg. "Prices [charged] in some areas of consulting could be down as much as 30% to 35%." Consulting companies' bottom lines have suffered, and some analysts argue that the industry will flounder until another Y2K-type problem sends Corporate America scrambling for help with large-scale systems makeovers.

The plight of Internet consulting firms such as Scient and Sapient, who saw half their business dry up and blow away in 2001, may have held back the stocks of some top firms. Think of it as guilt by association.

Accenture (ACN), formerly the consulting arm of Arthur Andersen, and the market-share leader among U.S. management-consulting firms, is a case in point. It went public at $14.50 a share in July, jumped to around $25, and has not been able to break much above that range since.

HITTING BOTTOM. But look again. Not only has Accenture taken steps to get its costs in line it also has a large concentration in outsourcing, one of the highest-growth areas in consulting. For those who believe that the consulting business will rebound when the economy does, now might be a good time to get the stock at a fairly reasonable price.

Although investors might have to wait until 2003 for the business -- and Accenture's share price -- to gain momentum, analysts believe that industry revenues have hit bottom. "Information-technology consulting and systems-integration assignments slowed to 5% growth in 2001, and outsourcing grew in the 8% to 10% range," says Wayne Cooper, the CEO of Kennedy Information,a Fitzwilliam (N.H.) research firm that follows the consulting and executive recruiting industries. That's a lot slower than the 18% annual revenue gains the industry racked up during the late '90s, but it still beats the zero growth it experienced in the 1990-91 recession.

Over the past year, companies have shifted away from hiring consultants to advise them on strategic growth issues, and "now you're seeing smaller, more-focused projects or big outsourcing projects," observes Terry Ozan, CEO of the Americas at CapGemini Ernst & Young. "Companies are focused on major projects that would change their cost structure or customer service."

OUTSOURCE GROWTH. Those shifts in emphasis play to Accenture's strengths. "They were never positioned as a big-think strategic-consulting firm that's competitive with McKinsey and Boston Consulting Group," says Karl Keirstead, an analyst at Lehman Brothers. Accenture declined to comment for this article.

Accenture has made a concerted effort to get into the fast-growth outsourcing business. Handling corporations' management-information systems accounts for about 19% of the firm's total revenue. Outsourcing grew by 32% during Accenture's fiscal 2002 first quarter, which ended Nov. 30. Over the next few years, it expects that area to generate about 30% of its revenues.

Thanks to Accenture's growth in outsourcing, government projects (up 58% quarter over quarter), and European business (up 26%), the firm was able to report year-over-year revenue growth of 5.6% in the November quarter. That's about the level that Kennedy Information's Cooper believes the industry can achieve this calendar year.

CROSS-POND PROBLEMS. One potential weakness in Accenture's revenue stream could be Europe, which makes up about 40% of revenues and has helped support overall performance as U.S. business sagged. "In the November quarter, Europe showed some mighty strength," says Andrew Steinerman, an analyst at Bear Stearns. "But it's hard to feel confidence in Europe going forward." Many economists predict that Europe's recovery will lag behind America's, which would be bad news for consultants pitching business on the other side of the Atlantic.

Perhaps even more important than the potential revenue picture in 2002 is how consulting firms manage their costs. Again, Accenture seems to be ahead of the pack. Overall, the consulting industry's body count grew by about 5% in 2001, even while it faced declining revenues. But Accenture cut 1,500 employees and put 1,000 more on furlough -- a common industry practice of giving an employee a one-year unpaid or reduced-pay sabbatical with the promise of a job in a year's time. The logic: When an upturn comes, a firm won't find itself without enough experienced personnel.

Between layoffs and furloughs, Accenture reduced its head count by 4%. It also improved its utilization ratio -- billable hours against total hours worked -- to 75%, the industry's highest. Accenture's ratio had been in the low 70s in August, according to Bear Stearns' Steinerman. "You need a 55% to 60% billable ratio to break even," says Kennedy's Cooper. In 2001, the industry average dropped to around 50%. Cooper believes that by now most firms have readjusted their employee bases to improve their utilization ratios, but even so, the industry average is now 65% to 70%. "They're doing all the right things internally to boost productivity and cut costs," says Lehman's Keirstead.

HIGHER TARGETS. While Wall Street is generally more pessimistic than Kennedy Information is when it comes to estimated revenue growth, analysts recognize Accenture's earnings potential. The Street consensus is for flat year-to-year revenues when Accenture announces fiscal second-quarter numbers on Apr. 11, but analysts fully expect the firm to beat the Street's $0.21 earnings per share estimate by a few pennies. According to First Call consensus numbers, analysts predict fiscal 2002 revenue growth of 3% (to $11.7 billion), earnings growth of 9%, and profits of $0.89 a share.

The consensus for next year is even brighter: revenue growth of 11% and earnings growth of 15%. Bear Stearns' Steinerman has a 12-month target price of $30 on the stock, while Lehman's Keirstead thinks it could hit $32 within a year. That's a potential upside of 15% to 23% in a market that most analysts say will produce single-digit returns at best.

These forecasts depend on business spending picking up again, and there's no telling when or how strongly that will happen. "Optimists argue that the industry will come back midyear," says Lehman's Keirstead. "For me, it's a 2003 recovery." Given that, he recommends that investors who want to dabble in an area that will benefit hugely from an impending economic recovery stick with industry leaders like Accenture. Popper is associate economics editor forBusinessWeek in New York


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