Accenture: In the Green
The former Andersen Consulting wowed Wall Street just before Christmas with strong quarterly earnings and an enhanced outlook for 2007. Plus: A CarMax update
Tiger Woods tees it up for Accenture on the consulting firm's Web site and in its marketing campaigns. But unlike Tiger's more famous sponsors, Nike and American Express, it's only a small exaggeration to say that Tiger himself often has shown more earning power than Accenture. That's now showing signs of change.
Accenture's long-term returns since its initial public offering at $14.50 per share in 2001 don't look so bad. That's because it spurted after the IPO and had another nice ride in 2003. But until a few weeks ago, the shares of what began life as Andersen Consulting (it was never implicated in the scandals that led to the dissolution of Arthur Andersen) had done little for more than two years despite the continuing buzz about outsourcing, globalization and the recovery of information-technology spending. Accenture won a huge automation job for Britain's national health service, but the move was a loser and cost the company big money. Three months ago, Accenture declared defeat in Britain and walked away from the health contract.
That decision, plus a surprisingly stout earnings report issued after the market closed on December 20, spurred a round of positive comments from Wall Street. Bank of America Securities added Accenture to its "new money focus list," its ten best ideas lineup. Several other brokerage analysts raised their one-year price targets from the $30s to as high as $45. The stock (symbol ACN) closed at $36.67 on December 21, up 4.5% for the day.
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Accenture also suggested that 2007 is shaping up well. The Bermuda-based company says it now has the power to raise prices faster. Accenture should also benefit from unusually strong growth expected among European Union nations next year. Europe is its largest regional source of business for Accenture.
Another bullish element is that investors seem enamored nowadays with brainpower. Virtually all that Accenture owns is the expertise and credibility of its employees. That's also the case with T. Rowe Price, which rises and falls on the success of its staff's skill at managing money, and Corporate Executive Board, which is the sum of its consultants' knowledge and efforts. Shares of Accenture have lagged those of the other two, despite financial attributes (such as a high return on equity) that compare favorably with those of other money managers and consultants. Accenture also has $2.5 billion in cash and practically no debt and (of course) inventories. If it can keep up the strong bookings and build its profit margins, it should see its price-earnings ratio expand from the current 17 (based on estimated 2007 earnings). And if it can get a higher multiple, its performance will be more befitting that of a charismatic golf champion.
A note about CarMax
Let me end 2006 with a few good words about bullish piece a colleague wrote for the December issue of Kiplinger's Personal Finance, How CarMax Profits From Fixed Prices. CarMax (symbol KMX) closed at $53.65, up more than 25% from its $44 price when we featured it in the magazine. More to the point, though, is that CarMax reported the kind of strong sales growth that confirms our judgment that this is a high-octane retailer, not the owner of a bunch of used car lots. To borrow from brokerage William Blair Co., which strongly recommends the stock even in the low $50s, CarMax is "hitting on all cylinders." And with that, we hope your stocks are doing just the same.
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