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10/11/2001
01:39 PM
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Taking Stock: Accenture's Diversification And Structure Should Serve It Well

Consulting firm is well-positioned for a turbulent market.

With the quarterly earnings season nearly here and televisions tuned to the news from Afghanistan, I thought InformationWeek's readers would appreciate something unexciting. I kept thinking about services, the best-performing segment of technology this year (even negative numbers are relative at times). A few names come to mind, but one that stands out is Accenture (ACN--NYSE), formerly Andersen Consulting, one of the largest management-and technology-consulting services companies.

Accenture has more than 75,000 employees world-wide in 46 countries. Its clients are a good cross section of the world's largest companies. Besides typical consulting services, Accenture also offers outsourcing services and venture-capital opportunities.

More important, Accenture is considered the high end of the consulting world, where execution is key and pricing tends to be a secondary consideration. Although a late entry to outsourcing, it's gaining more traction, with outsourcing now representing about 18% of total revenue.

Outsourcing helps stabilize business revenue with multiyear contracts, a nice defensive feature in a declining stock market. Accenture's outsourcing business has more than 15,000 dedicated employees and more than 225 clients. It includes business transformation, business-process outsourcing, business-application outsourcing, and technology-infrastructure outsourcing.

One area of strong growth will be in business-process outsourcing, which includes administering and managing back-and front-office processes as a third-party vendor. Prior to Sept. 11, Accenture was on the shortlist for nine potential $1 billion-plus deals. It's possible that up to four of those deals may have since been deferred.

Though Accenture's business will still suffer due to its high exposure to the financial-services and technology industries (those areas comprise about 55% of its fiscal 2000 revenue), areas of new growth should help offset any revenue losses. There will still be demand in this environment where businesses remain focused on cost-cutting and outsourcing noncore functions.

Another way to offset revenue loss has been Accenture's "share-in-savings" contracts. The company puts up the initial investment for systems development in exchange for a part of the cost-savings derived from the implementation. Accenture also should benefit from its growing federal consulting business; the government pumps $75 billion into the economy.

Because Accenture focuses on high-end businesses, its gross and operating margins are in excess of 36% and 12%, respectively, which is very competitive within its peer group. However, in a declining economy, I expect greater margin pressure from the competition, which includes Computer Sciences (CSC--NYSE), EDS (EDS--NYSE), IBM Global Services (IBM--NYSE), and KPMG Consulting (KCIN--Nasdaq).

Though investors usually look at consulting services and outsourcing companies for defensive reasons, this time may be different. Because many of the consulting deals could be discretionary and IT spending is declining worldwide, there could be a substantial risk to revenue next year. However, because of Accenture's organizational structure, it should be able to react aggressively with cost-cutting to mitigate some of the revenue risk.

Accenture earned 81 cents per share, excluding one-time charges and investment gains, on revenue of $11.44 billion in fiscal 2001, which ended Aug. 31. It reported its fourth quarter and full-year numbers last week, its first financial report as a publicly traded company.

After Accenture's initial public offering on July 19, the share price declined more than 10%, to $13.40 from $15, before getting a bounce from last week's numbers. IPOs are usually priced at a discount to be perceived as fair value, so you can assume the shares represent reasonable value in a weak market. My fair value is around $18 by the end of next year, a sizeable discount on today's price. That's no home run, but it's not bad given such a strong and stable franchise.

William Schaff is chief investment officer at Bay Isle Financial Corp., which manages the InformationWeek 100 Stock Index. Reach him at bschaff@bayisle.com.

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