Should Investors Buy These 3 Companies Now?

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Recently, Accenture (NYSE: ACN) dropped as much as 10.30% in a single day to $71.96 per share. The drop was due to its sluggish third-quarter revenue and lower outlook for the full year. Since the beginning of the year, Accenture, with a gain of just 8.2%, has lagged the S&P 500’s return of 12.6%. Should investors consider the recent plunge in its share price as a buying opportunity? Let’s take a closer look.

Accenture missed revenue estimates and lowered full year guidance

Accenture operates in five main business segments: Communications, Media & Technology, Financial Services, Health & Public Service, Products and Resources. In the third quarter of 2013, most of its operating income, $275.7 million, was generated from the Financial Services segment. The Products segment ranked second with nearly $264 million in profits. In Q3 2013, the Financial Services segment enjoyed the highest operating margin of 18% while the Resources segment had the second highest margin at 17%. The Products segment’s operating margin was 15%.

In the third quarter this year, Accenture experienced just a 1% increase (in U.S. dollar terms) in revenue to $7.2 billion, a bit lower than the company’s previous guidance range of $7.25 billion to $7.50 billion. It was also lower than the average analysts’ revenue estimates of around $7.42 billion. Its adjusted EPS, excluding a $0.07 benefit from reorganization, came in at $1.14, slightly higher than analysts' expectation of $1.13 per share.

What I am interested in is Accenture's share buyback activity. During the third quarter, the company redeemed 7.8 million shares worth $618 million. Since the beginning of the fiscal year 2013, the company has retired 19.8 million shares on the market with a total investment of $1.4 billion. Even with the lower-than-expected revenue, Pierre Nanterme, the company’s Chairman and CEO was bullish about its profitability, operating margin expansion, EPS growth, and a strong balance sheet. He mentioned that the company has generated $1.4 billion in free cash flow for the quarter and has a cash balance of $5.9 billion.

For the full year, Accenture lowered its revenue guidance from a range of 5%-8% to only 3%-4% in local currency. Its diluted EPS for the full year was also being adjusted from $4.89-$4.97 range to a range of $4.90-$4.94. At around $72 per share, Accenture is worth nearly $46.9 billion on the market. The market values Accenture at 9.4 times its trailing EBITDA (earnings before interest, taxes, depreciation, and amortization).

IBM: Lower valuation with $70 billion in cash return

Compared to its much bigger peer, International Business Machines (NYSE: IBM), Accenture still has a much higher valuation. The market values IBM at 8.84 times its trailing EBITDA. Because of a sluggish operating performance at Accenture, IBM also declined 2.3%. IBM has been expanding its footprint in growth markets such as business analytics and cloud computing, and is also entering new markets. In the past twelve years, IBM has successfully expanded in the software field.

The software revenue as a percentage of operating income has increased from 27% in 2000 to 45% in 2012. In 2015, the company expects that 50% of revenue would come from the software segment. What might make investors interested is its good use of cash. Since 2000, IBM has used as much as $237 billion to grow the business and return cash to investors. Around $123 billion was used for share repurchases and $26 billion was used for dividend payments. In the next two years, IBM is expected to return an additional $70 billion, including $50 billion in share buybacks and $20 billion in dividends.

Oracle might repurchase as much as $12 billion worth of shares

Oracle (NYSE: ORCL) is another tech giant that experienced a large drop recently. Its share price fell nearly 9% to only $30.30 per share due to sluggish sales in the fourth quarter. Oracle’s revenue came in at $10.95 billion, a bit lower than analysts’ expectations of $11.12 billion. Oracle grew its software revenue 4% while simultaneously experiencing a 9% decline in the hardware business. However, the company still generated as much as $14 billion in operating cash flow for the full year, and raised its cash position to as high as $32 billion.

Interestingly, the company doubled its quarterly dividend, from $0.06 per share to $0.12 per share. Moreover, its shareholders could receive more cash from the company with its recent additional potential share repurchase of as much as $12 billion. The market values Oracle at only 7.4 times its trailing EBITDA. With a dividend yield of 1.6% and a potential share buyback yield of 8.4%, investors might expect a total yield of around 10%.

My Foolish take

Among the three companies, I like Oracle and IBM due to their global leading positions and their potential cash return to shareholders. While Oracle could return as much as 10% in total yield to investors, IBM’s total yield is much higher, at as much as 35%, including the current dividend yield of 2%, the potential dividend yield of 9.4% (on $20 billion potential dividends) and the potential buyback yield of nearly 23.6% (on $50 billion potential share repurchases).

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Anh HOANG owns shares of Oracle. The Motley Fool recommends Accenture. The Motley Fool owns shares of International Business Machines. and Oracle.. 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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