Coverage Initiated on Accenture

Zacks

On Apr 4, 2014, we initiated coverage on Accenture plc (ACN), the consulting, technology and outsourcing services provider. The company reported dismal second-quarter results on Mar 27, 2014, wherein both the top and bottom lines missed the Zacks Consensus Estimate.

However, revenues increased on a year-over-year basis reflecting an increased focus on the Outsourcing business, strong new bookings. Accenture has been steadily gaining traction in its Outsourcing business backed by the increased demand for technology that can improve operating efficiencies and lower costs.

The improvement was mainly due to the growing demand for its outsourcing solutions in Europe. Enterprises from Europe are increasingly offshoring jobs to cut costs, improve operational efficiency and reduce headcount. This bodes well for the company as deal wins will translate into higher revenues.

Moreover, Accenture’s strong balance sheet enables the company to look for strategic acquisitions and invest in growth initiatives. As of Feb 28, 2014, the company had cash and cash equivalents of $3.68 billion and long-term debt of $26.3 million, bringing the net cash position to $3.65 billion. Additionally, Accenture’s strong operating cash flow has helped it to return cash through regular quarterly dividend and share repurchases.

Nonetheless, Accenture’s market share and revenues necessarily depend on client relationships and the number of contracts it secures. This, along with the limited scope for product differentiation makes the renegotiation of large contracts extremely important.

As a result, competition from strong companies like Genpact Limited (G), Cognizant Technology Solutions Corp. (CTSH) and Infosys Ltd (INFY) is a constant pressure.

Additionally, dismal performance by Accenture’s consulting business remains a concern. Revenues from the consulting business comprise more than 50% of the total revenue. As consulting is a high-margin business for the company, any disruption will impact the overall margin performance.

Currently, Accenture has a Zacks Rank #2 (Buy).

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