Should the Fall Be Taken As a Buying Opportunity

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

Accenture (NYSE: ACN) dipped 5.45% on Thursday, trading at as low as $66, although it picked up and closed at $69.02 at the day end – still a plunge of 2%. The primary reason why the shares of world’s second- largest technology-consulting company fell the most in more than a month are its revenue for first quarter falling short of analysts’ estimates and its estimate for the second quarter not meeting the Wall Street’s expectations.

First Quarter In Brief

Net revenue, or revenue before reimbursable expenses, climbed 2.1 percent to $7.22 billion from $7.07 billion, a year earlier. This was slightly lower than the expectations of the analyst’s which stood at $7.30 billion. Revenue shows an increase of 2 percent in U.S. dollars and 5 percent in local currency.  Revenue seems to have been hit by two major reasons – firstly the clients choosing long-term contracts that don’t produce revenues quickly and secondly, the soft European-based consulting demand. CFO Pamela Craig said the pattern will continue into the second quarter. Revenue forecast for the fiscal second quarter is between $6.9 billion to $7.15 billion, compared with the $7.14 billion average estimate of analysts.

Net Income for the first quarter rose to $698.8 million, or $1.06 a share, from $642.1 million, or 96 cents a share a year earlier, a growth of 10% per share basis. Analysts predicted $1.05 a share. Of the total revenue, Consulting net revenues for the quarter were $3.96 billion, a decrease of 3 percent in U.S. dollars and flat in local currency compared with the first quarter of fiscal 2012. On the other hand, Outsourcing net revenues were $3.26 billion, an increase of 9 percent in U.S. dollars and 13 percent in local currency over the first quarter of fiscal 2012.

A Review on Competition

The company trails only International Business Machines (NYSE: IBM) in technology-consulting sales. IBM is scheduled to report its quarterly earnings next month for the period ending in December. IBM reported its third quarter (September ending) revenue at $24.7 billion, down 5% from previous year. Divestiture of Retail Store Solutions (RSS) reduced revenue by 1% and Services revenue also down by 5%. Net income stood flat at $3.8 billion while operating income went up by 5 percent to $4.2 billion. For the fiscal year 2012, IBM is expected to report diluted earnings per share of at least $14.29.

Fiscal year 2012 has been rough for Infosys (NYSE: INFY). The shares have plunged 19% this year and the major reason being the changes it has made recently to go from primarily being an outsourcing firm to one that is more into consulting. The profit margin of the company, which stands at 27%, is also a concern for the investors. When compared with Accenture’s 12% profit margin, such high margins clearly look unsustainable.

Looking Forward

The shares of the company have risen some 30% year to date outperforming NASDAQ’s 17% rise. Accenture looks well positioned into 2013 in part because it is gaining market share and maintaining strong traction with existing and new clients. The expected range of diluted EPS has also been revised to $4.24 and $4.32 from the previously guided range of $4.22 and $4.30. On Nov. 15, the company paid a semi-annual cash dividend of $0.81 per share. This dividend represents an increase of 13.5 cents per share over the company’s previous semi-annual dividend, declared in March.

Final Call 

Though weak consulting business could be a reason for concern, management seems confident that growth in outsourcing will mitigate the loss. The major cause for revenue weakness in reported quarter has been clients showing a slow spending pace on small and mid-sized consulting deals. However the positive takeaway is that the large-scale consulting deals, where Accenture is highly distinctive and specialized, are experiencing healthy demand. Moreover, the fact that the company is contracting on longer-term consulting will make all the final business more resilient with more visibility over time.

All these positive analytics clearly provide a ‘buy me’ signal.

nileshmundhra has no positions in the stocks mentioned above. The Motley Fool owns shares of International Business Machines. Motley Fool newsletter services recommend Accenture Ltd. and International Business Machines. 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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