This Global Consulting Firm is Poised to Outperform
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Consulting can be an attractive business area. Corporations all over the planet have complex and dynamic needs in areas like technology and outsourcing, and it doesn't make much sense to try to find every solution in house. Companies like Accenture (NYSE: ACN) deliver a valuable service by providing their specific knowledge and experience into areas in which most clients are not prepared enough to make the right decisions by themselves.
Accenture has a deep international presence, with more than 200 offices in 53 countries, and the company has been able to build solid relationships with its clients by leveraging its industry-specific knowledge: Accenture has 17 focused industry groups with expertise on different business areas. The company is one of the main players in its industry: 96 of the Fortune Global 100 companies and more than three quarters of the Fortune 500 are served by Accenture.
Accenture understands the importance of client relations in this industry, and the company has been able to integrate itself deeply into its clients’ organizations by building a complete set of solutions in different areas. Accenture can proudly say that more than 90% of its biggest clients have been with the company for more than 10 years, and that's an important advantage when it comes to selling new services or expanding into the same client in a different country.
The company made a smart strategic move when it identified the outsourcing trend early in the game; Accenture established delivery centers in low-wage countries like India and the Philippines, and it positioned itself as a leader in outsourcing. Most of these projects are recurring long-term contracts that don't fall into clients' discretionary budgets, and this gives Accenture a more predictable revenue stream in comparison with competitors.
From a competitive point of view, the main rival in software and services is IBM (NYSE: IBM), which has a tremendously powerful brand presence combined with a true global reach. It seems however that there is enough room for both companies in the market; in fact, Accenture has been outgrowing IBM over recent years, with an 8.5% annual increase in sales over the last five years for Accenture versus a 3% for IBM during the same period.
There are many smaller competitors in outsourcing, including companies like Infosys (NYSE: INFY), Wipro (NYSE: WIT) and Computer Sciences Corporation (NYSE: CSC). These kinds of companies can be more aggressive when it comes to pricing and they have gained some ground among smaller clients. But they don't have the same size and global reach that Accenture can provide.
Just to have an idea about relative size: Accenture has a market capitalization of $42 billion while Infosys is near the $25 billion in market cap and Wipro is around $22 billion. Computer Sciences Corporation comes in a distant fourth place with a much smaller market cap under the $4 billion level. This puts Accenture in a privileged position versus the competition when dealing with big global clients in the outsourcing business.
The numbers look good both from a balance sheet and profitability perspective. Accenture has more cash than debt in its balance sheet, so investors don't need to worry about its financial position. The company has operating margins in the 12.5% zone, and during the last recession it managed to sustain profitability much better than most competitors. The business does not require a lot of capital, so Accenture has an outstandingly high return on equity in the 63% area.
Valuation wise, there is still room for more gains in Accenture -- the stock is trading at a P/E ratio of 15 and yielding 2.3% in dividends. Those dividends have increased by more than 25% annually since the company started paying them in 2005, so future dividend increases should be another source of returns for investors.
A high-quality company selling smart solutions to clients all over the planet sounds like a good long-term bet, especially if you can get shares at very reasonable prices.
acardenal owns shares of IBM The Motley Fool owns shares of International Business Machines. Motley Fool newsletter services recommend Accenture Ltd. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.
