Accenture’s Consulting Work Sounds Sexy – But Worth a Premium to IBM?
Accenture (ACN) is something of a bellwether for CEO optimism: the guys and gals in the corner office typically hunker down during bad times, and then come to life with ideas – some actually worthy of implementing – when the economy picks up.
Every idea -- be it an acquisition, a new product line or a reorganization -- needs a consultant’s rubber stamp, of course, and Accenture is among the market leaders. And for the idea-challenged CEO, Accenture and other consulting shops are happy to provide ideas from the outside. Accenture’s market cap wouldn't top $40 billion if it wasn't a favorite of CEOs.
So, as the economy picks up steam, watch out for ideas under construction, and also keep an eye on Accenture shares. Its business has been growing strongly since the recession officially ended in the summer of 2009. Accenture's stock weakens during a recession and then rises as the economy grows.
But has it gotten ahead of itself? Standing Accenture up against its bigger, somewhat-rival, International Business Machines (IBM), Accenture looks pricey.
Sure, Accenture has strong points backing up its higher valuation: its revenue and net income gains on a trailing 12 month basis over the past five years have bested those of IBM.
IBM's earnings per share growth is stronger, but it does a lot of buybacks. Accenture has not.
IBM's profit margins – it sells products and software, too, which can be higher margin -- are more than twice those of Accenture. IBM is less of a pure play on consulting. But is that bad? On a forward basis, Accenture's PE of 15 is higher than IBM's 12.5.
The rate of growth at both companies is slowing. Wall Street expects Accenture's earnings to rise 13.5% in the current fiscal year, which ends in August, but that rate falls to a gain of 11% next year. Similarly, IBM's earnings growth this year, ending Dec. 31, is expected to be 11%, slipping to 10% next year. Accenture’s dividend yield of about 2% tops IBM but these aren't big dividend stocks.