3 Names to Make Your Business Profitable
Damian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As the complexity in the business world increases, government regulated industries find it more difficult to maintain profitability and outsourcing becomes more convenient, and as a result, consulting companies seem poised for growth. In this field, three big names should be taken into account by fundamental, long-term investors: Accenture (NYSE: ACN), Navigant Consulting (NYSE: NCI), and CGI Group (NYSE: GIB).
Accenture: Strong position in the market
Accenture is one of the main go-to names in the management and IT consulting business. With one of the biggest global operations in the field, companies think of Accenture when looking for unmatched capabilities and international presence, alongside its knowledge and expertise.
One of the keys to this firm's success is its customer relations; as service providers, Accenture establishes close and productive relationships with its clients, which trust it not only with sensitive information, but also with planning for the future. Given this situation, the stickiness of its client base is outstanding. Furthermore, the company has proven proactive, efficient, and effective. Therefore, new clients constantly feel attracted by its value proposal.
But, Accenture is not only about consulting, but also about solving issues. As such, it has also become an outsourcing firm that has allowed other companies to save money by establishing operations in cheap-labor (but educated) countries like India, the Philippines, and Argentina. Its early incursion in this field has helped it generate a steady cash flow, as outsourcing, unlike consulting services, is usually stable and long-term, or at least recurring. By establishing its business in various countries, the firm is able to compete with offshore consultants and IT service companies that face lower costs than U.S.-based enterprises.
Although its stock trades a little above the industry average, at 19.4 times P/E (versus the 19.1 mean), I would recommend buying Accenture's shares. With an industry leading human capital and profiting from other companies’ disruptive innovation without incurring in the costs and risks implied, its financials are among the strongest in the segment. Poised to deliver consistent growth -- although not at the highest rates but rather around 11.5% annually -- this is a good company for your retirement portfolio as a deterioration in its market conditions doesn't seem anywhere near -- actually, the situation is the opposite.
Navigant Consulting is another interesting firm in the industry that counts a wide customer and consultant base (roughly 1,800 advisers). Formerly known as The Metzler Group, Navigant is an established name in the specialty consulting segment, particularly among highly regulated or structurally changing industries, like energy, financial, and healthcare sectors.
With an expected EPS average annual growth rate of 12.5% for years to come, the firm offers compelling long-term prospects. I believe that the firm will outperform its peers based on its large consultant base and its long-standing, sticky, customer relations.
Although it focuses on litigation consulting, its product portfolio is quite wide, comprising four segments: (1) Disputes, Investigations & Economics, (2) Financial, Risk & Compliance Advisory, (3) Healthcare, and (4) Energy.
In the medium and long-term, the energy and healthcare businesses provide plenty of growth opportunities. In a changing regulatory and demand context, new and efficient energy sources are being explored, thus creating a considerable demand for industry-specific consulting. The healthcare reform has and will continue to create demand for the firm’s services too, as many companies seek to comply with new regulations while seeking new paths to increased profitability. To fully capitalize on this situation, Navigant acquired EthosPartners Healthcare Management, Paragon Health, and Easton Associates.
Some analysts argue that Navigant’s consultant-centered model limits its profit growth potential and generates higher expenses on wages. However, I believe that through compensation expenses, the company pays for its more valuable asset, its counselors, which have been central to client retention and attraction.
Several other growth catalysts can be found within the firm, especially in the mortgage servicing review and credit card litigation segments. Trading at 14.1 times P/E, about a third of the average industry valuation, while offering healthy financials, above average profitability, encouraging results last quarter, and compelling growth opportunities, I’d say that Navigant is a strong buy case.
CGI Group: To watch carefully
CGI Group is Canada’s largest IT consulting firm. It has also entered successfully into various European and U.S. markets. Analysts expect growth for the next five years at a 17.25% annual rate, coming from both organic and inorganic sources. Acquisitions have played a highly relevant role in the past and management has proven its skills in choosing and integrating the purchased firms. Organic growth is expected from client stickiness coupled with growing IT budgets and an increasing demand for outsourced IT services in Canada, U.S., and Europe.
However, I would recommend holding due to its lack of a moat against competitors. Not only can its services be replicated to a certain degree, but also, several other companies can offer lower cost, overseas-based services. Although the acquisition of Logica provided considerable penetration and a leading position in the European market, and the American Management Systems and Stanley purchases did similar for its U.S. operations, its lack of presence in emerging, low labor-cost markets makes it less competitive in terms of pricing and global presence. Furthermore, “forty-five percent of CGI's revenue depends on clients' discretionary spending, and an uncertain macroeconomic environment could curtail this revenue source.” (Morningstar).
In terms of valuation, I feel a little discouraged too. CGI trades at 172.4 times its earnings and this doesn't look very justified by its financials. Margins and returns are very close to zero values, substantially below industry averages, same as its debt to equity relation.
Nevertheless, growth catalysts could pay out. I'd advise keeping an eye on the firm, especially as its cash flows have been consistently high and it has been experiencing several institutional share purchases in the past months.
Offering a sticky customer base, highly customized and specific products, strong financials, and plenty of growth opportunities as the energy and healthcare segments become more complicated and regulated while trading way below the industry average valuation, I'd strongly recommend buying Navigant Consulting stock. Furthermore, keep Accenture in mind as well as it looks like an interesting investment option, and it seems like you can't go wrong with it.
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Damian Illia has no position in any stocks mentioned. The Motley Fool recommends Accenture. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!