IT and Consulting - 2 Winners 1 Loser

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The technology and consulting firm Accenture PLC (NYSE: ACN) announced strong quarterly growth for its second quarter. Here are the highlights from Accenture’s most recent quarter:

  • Earnings per share were $1
  • New client bookings rose by 15% compared to the same time last year
  • New client bookings rose by 21% from the previous quarter
  • Revenue rose by 3% to $7.49 billion
  • A semi-annual cash dividend of $0.81 per share was announced

All of these are positive signs for investors, but let’s take a closer look at the financials to see where the profits are coming from.

Accenture finances

Accenture has two different revenue streams: consulting and outsourcing. The company operates globally with its largest operations in the Americas followed by Europe, Middle East, and Africa and finally Asia pacific.

Revenue (in millions)

<table> <thead> <tr><th> <p><strong>Region</strong></p> </th><th> <p><strong>Q2FY13</strong></p> </th><th> <p><strong>Q2FY12</strong></p> </th><th> <p><strong>Growth Rate</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p><strong>Americas</strong></p> </td> <td> <p> $3,280.00</p> </td> <td> <p> $3,028.00</p> </td> <td> <p>8.32%</p> </td> </tr> <tr> <td> <p><strong>EMEA</strong></p> </td> <td> <p> $2,800.00</p> </td> <td> <p> $2,798.00</p> </td> <td> <p>0.07%</p> </td> </tr> <tr> <td> <p><strong>Asia Pacific</strong></p> </td> <td> <p> $978.00</p> </td> <td> <p> $971.00</p> </td> <td> <p>0.72%</p> </td> </tr> </tbody> </table>

EMEA saw the slowest growth rate from the same time period the prior year. This is largely due to the economic uncertainty in Europe. One of the greatest factors for Accenture’s success is the economic climate.

<table> <thead> <tr><th> In millions</th><th> <p><strong>Q2FY13</strong></p> </th><th> <p><strong>Q2FY12</strong></p> </th><th> <p><strong>Growth Rate</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p><strong>Consulting</strong></p> </td> <td> <p> $3,753.00</p> </td> <td> <p> $3,775.00</p> </td> <td> <p>-0.58%</p> </td> </tr> <tr> <td> <p><strong>Outsourcing</strong></p> </td> <td> <p> $3,305.00</p> </td> <td> <p> $3,022.00</p> </td> <td> <p>9.36%</p> </td> </tr> </tbody> </table>

Overall consulting revenue has declined while outsourcing revenue has grown. Economic uncertainty pushes companies to outsource some operations. The company is spread across many industries. This limits drastic drops in revenue due to market conditions and allows for steady growth. The health and public services and financial services are the two strongest growth areas. This is largely due to the challenges of those two industries over the last year.

<table> <thead> <tr><th> <p><strong>Operating Group (in millions)</strong></p> </th><th> <p><strong>Q2FY13</strong></p> </th><th> <p><strong>Q2FY12</strong></p> </th><th> <p><strong>Growth Rate</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p><strong>Communications, Media and Technology</strong></p> </td> <td> <p> $1,411.00</p> </td> <td> <p> $1,481.00</p> </td> <td> <p>-4.73%</p> </td> </tr> <tr> <td> <p><strong>Financial Services</strong></p> </td> <td> <p> $1,509.00</p> </td> <td> <p> $1,377.00</p> </td> <td> <p>9.59%</p> </td> </tr> <tr> <td> <p><strong>Health and Public Services</strong></p> </td> <td> <p> $1,193.00</p> </td> <td> <p> $1,056.00</p> </td> <td> <p>12.97%</p> </td> </tr> <tr> <td> <p><strong>Products</strong></p> </td> <td> <p> $1,681.00</p> </td> <td> <p> $1,585.00</p> </td> <td> <p>6.06%</p> </td> </tr> <tr> <td> <p><strong>Resources</strong></p> </td> <td> <p> $1,252.00</p> </td> <td> <p> $1,293.00</p> </td> <td> <p>-3.17%</p> </td> </tr> <tr> <td> <p><strong>Other</strong></p> </td> <td> <p> $12.00</p> </td> <td> <p> $6.00</p> </td> <td> <p>100.00%</p> </td> </tr> </tbody> </table>

Growth next year will be in the double digits. The global economy has room to improve this year – especially with regards to financial services and the healthcare industries. With this grow, the stock has some room to move to $77.50-$78 per share over the next year.

Competition 

Infosys (NYSE: INFY) and Cognizant Technology Solutions (NASDAQ: CTSH) are two other technology and consulting companies competing with Accenture. So, how do they compare?

Infosys was ranked as the 19th most innovative company by Forbes magazine. It operates in over 30 countries helping companies solve problems and innovate with technology. The India-based company has been expanding into Germany with a large-scale project with BMW. The company is trying to change its business mix and enter new opportunities. This will come at a cost with hiring new people and engaging in new technology. Growth is expected to be flat through the next year. Investors expect more than that from companies. So, I don’t see this is a strong company to invest in for now. The stock has had a drastic gain over the last year and surged by 19% in one day this past January. At $53.40 per share, the company is price a little high.

Cognizant Technology Solutions saw strong growth in financial services and healthcare during 2012. Total revenues grew by 20% in 2012 from 2011 to $7.3 billion. This is largely due to what the management call a “continued expansion of the market for global delivery of IT services and business process outsourcing.” The company also saw an 8.9% increase in revenue from Europe. This is something Accenture was not able to accomplish. Growth next year should be solid double digit and the stock price has a 10% upside potential. 

Final thoughts

Each of these companies' success are tied directly to market conditions. Uncertainty and growth both fuel future profits. The international market will see both of these this year. Investors have already taken the growth of Infosys into consideration and the company is reasonably priced right now. But, Accenture and Cognizant are two companies investors should consider. Over the next year they both have great upside potential as investors are waiting to see how far they will grow. Get in now and grow alongside them. 


Austin Higgins 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!

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