Accenture Plc Reports Earnings. Cue Wild Applause

By Markets Fool.com

Accenture reported Q2 earnings last week, and the crowd went wild -- Accenture shares are up nearly 7% since.

Continue Reading Below

It's not often you find investors getting this excited about a boring ol' consulting company. So, what was it, exactly, that had shareholders jumping out of their seats (and hitting the "Buy More" button)?

Let's take a quick look at the results and see if we can figure this out. In Q2, Accenture reported:

  • 5% improvement in revenue at $7.5 billion for the quarter.
  • Earnings up a similar 5%, at $1.08 per share.
  • Free cash flow essentially flat at $220 million.
  • Improved operating profit margin, up 30 basis points to 13.6%
  • And a whole lot more new business to apply that profit margin to, with $9.4 billion in new business brought in during the quarter.

It's that last number that seems most likely to have gotten investors excited. According to S&P Capital IQ, 13.6% operating profit margins is actually bit below par for Accenture. The company has only earned lower quarterly margins than that a couple of times in the last three years.

In contrast, Accenture ordinarily does somewhere in the low- to mid-$7 billions for quarterly revenue. The addition of $9.4 billion in new contracts promises to bump up that average quite a bit. It might be enough to exceed analysts' consensus earnings growthprojection of 10% for Accenture over the next five years. It should certainly help Accenture to hit its own new target for revenue growth -- now set at 8% to 10% (in local currency), a big improvement over Accenture's prior projection of 5% to 8% revenue growth.

Continue Reading Below

Projections... and a big problem
Looking forward, Accenture now projects that Q3 revenue will range from $7.35 billion to $7.6 billion, with full-year revenue growing as much as 10%. If achieved, that would suggest maximum revenues of $33 billion for Accenture this year.

But here's the problem: That 10% growth rate Accenture is positing is in local currency. Translated back into appreciating U.S. dollars, revenue growth (and profit growth) could be quite a bit low. To illustrate, Accenture says it grew local currency revenues 12% in Q2 -- but in dollar terms, growth was only 5%.

Management sees currency exchange rates subtracting 11% from growth in Q3, and 8% for the full year. As a result, Accenture has cut its earnings projection for the full year by more than a nickel, to a range between $4.61 and $4.71 per share.

Valuation
At Accenture's current share price of $94 and change, that works out to a current-year P/E ratio of perhaps a little over 20. This seems rich for a company expected to grow earnings at 10%, and richer still given the problems Accenture faces with an appreciating dollar eating away at its profits.

Even with strong free cash flow to its credit ($3.9 billion in FCF, versus just $3 billion in "GAAP" profits), the stock looks overpriced to me at a price-to-free cash flow ratio of 15, and a 2.2% dividend payout. While not as pricey as a lot of other stocks I could name, Accenture is no bargain at today's prices.

The article Accenture Plc Reports Earnings. Cue Wild Applause originally appeared on Fool.com.

Rich Smithdoes not own shares of, nor is he short, any company named above. You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 318 out of more than 75,000 rated members.The Motley Fool recommends Accenture. 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.