This Stock is a Cash Machine
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I know that the consulting and outsourcing business is tough. I know that this company competes against the likes of IBM (NYSE: IBM), Computer Sciences (NYSE: CSC), and many others. However, when you get right down to the numbers, Accenture (NYSE: ACN) might be the best cash-generating stock I've seen in a while. This is a low expenditure, high-profit business. Let me walk you through Accenture's recent earnings and show you what impressed me so much.
With reported revenue up just 2% you might make the argument that Accenture's earnings report wasn't that great. However, even this seemingly weak number hides the real truth. The company actually showed 9% higher revenue in local currencies, but translations negatively affected the reported number. Since sales in local currencies are more indicative of the strength of the business, 9% growth is pretty good. The company reported EPS up 13%, which most investors would be happy with.
For those who don’t know, Accenture operates in basically two different business segments. The consulting business generates about 55% of revenue, and outsourcing covers the other 45%. Consulting revenues showed a mirror image of what happened at the company overall—reported revenues were negatively affected by currency translations, but in local currency sales were up 2%. Outsourcing showed very impressive results, with reported revenue up 10%, but in local currency net revenues grew 18%.
There are two critical things to understand in consulting and outsourcing: companies in this business want a high utilization rate and a low attrition rate. Accenture is steadily improving both of these figures. Utilization increased from 85% to 87%, and attrition has dropped consecutively from 14% in the fourth quarter of 2011 to 12% in the most recent quarter. What was even more impressive was the company's results on a geographic basis.
Accenture's largest market is the Americas, representing about 46% of total revenues. Revenues in the Americas increased 8% on a year-over-year basis. The company's second-largest market is Europe, Africa, and the Middle East, which covers about 38% of revenues. Even with the challenges in Europe, the company reported an 8% increase in local currency sales. Asia-Pacific is the company's smallest market, but potentially the most important to its future as it only represents about 16% of revenues, but showed 14% growth using local currency. With strong organic growth across the globe, you can see that Accenture is doing very well. While this is impressive, the company's financials are the reason to consider the stock.
In the last quarter, the company generated almost 24% more operating cash flow, from an operating margin of 13.8%. While Accenture has some work to do to catch IBM’s near 20% operating margin, its performance compares very favorably to Computer Sciences’ margin of just 3.11%. This allowed the company to generate $1.6 billion in free cash flow, which Accenture used to repurchase about 12 million shares at an average price of $58. In the last year, the company has retired nearly 3% of its outstanding shares through repurchases.
This huge cash flow prompted management to increase their semi-annual dividend by 20%, all while maintaining a cash balance of over $6 billion. Keep in mind that this was all achieved from roughly 8% organic growth. These numbers argue for investors in Accenture to do very well going forward.
The company sees full year revenue growth of 5% to 8% in local currency and EPS of between $4.22 and $4.30. With these assumptions, the stock sells for about 16.5 times forward earnings at most. Analysts expect earnings growth of over 11%, and Accenture has a history of beating expectations. In fact, in the last four quarters the company has beaten expectations each time by an average of 5.28%. If Accenture continues this streak, the company's growth rate would come in faster than analysts are predicting.
The company's new dividend gives the stock an equivalent yield of 2.48% versus nearly an identical yield at Computer Sciences. The difference is that while Accenture is expected to grow by 11%, Computer Sciences is only pegged to have 8% growth. IBM is the biggest player in the field, and while Big Blue is extremely well respected, its overall numbers can't compete with Accenture. IBM is expected to grow by about 10%, but its yield of 1.61% is nearly a percentage point less than Accenture. For investors looking to play the continued move toward outsourcing and consulting, Accenture is an absolute cash machine of a stock.
MHenage has no positions in the stocks mentioned above. 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.