Growth and Shareholder Value Make Accenture Undervalued

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Despite posting increases in revenue and earnings in its last two earnings reports, Accenture (NYSE: ACN  ) has seen its share price decline 10% from where it was in June. Why has the market reacted this way? Is there value in Accenture?

Specific and general concerns
In its third quarter earnings report from June, the company made a slightly downward revision to its full-year expectations along with slower-than-expected revenue growth. The stock saw a 10% decline immediately following the announcement.

Accenture's fourth-quarter earnings report showed revenue exceeded expectations and earnings came in on the high end of yearly expectations. Despite this, the company saw its price take another dip of roughly 10% during the two weeks following the report.

The stock has gained over 10% of its value since mid-October, but it seems clear that the summer's earnings release, with its downward revision and slower-than-expected growth, bothered many investors.

There is also a concern among investors that the global management consulting sector is fiercely competitive with little room for growth. It is hard to capture where the competition stands in this sector, given that some of the major players like McKinsey and Deloitte are privately held.

Accenture compares well
Compared to some of the public companies in the sector, the market's cautious attitude toward Accenture seems misplaced. IBM  (NYSE: IBM  )  is one of the larger players in the field. The company's global services recently saw revenue decline in its IT sector and remain flat in its business sector. IBM's traditional infrastructure and hardware business hurts the company, as it tries to integrate that model into its business services platform. In addition, the company is tied to its high-margin software sector and tries to integrate its software products in its services packages. Neither of these issues plague Accenture.

Cognizant Technology Solutions  (NASDAQ: CTSH  ) is a smaller competitor of Accenture. Cognizant continues to revise its yearly revenue growth upward, forecasting over 20% growth for 2013. It has more than weathered the global slowdown and is in fact thriving.

But, Cognizant is still roughly one-third the size of Accenture. While Cognizant is an attractive stock, it is unfair to make a one-on-one comparison given the size discrepancy. Cognizant is at the point where its growth might mean smaller revenue increases. As a small company grows, it is inevitable that large growth rates will begin to shrink.

Growth and income
Accenture has a proven track record of strong growth. Slight downward revisions, like we saw this summer, should not result in a 10% decline in the stock price, especially after the latest earnings call beat expectations.  

The company has seen revenue grow by more than 11% over the last two years. Earnings per share have increased over 28% during that time, while dividends have increased almost 15%.

  Revenue / EPS Summary *  
 Fiscal Quarter
(Fiscal Year)
(Fiscal Year)
(Fiscal Year)
   Revenue $7,668(m) $7,589(m) $6,478(m)
   EPS 1.06 (11/30/2012) 0.96 (11/30/2011) 0.81 (11/30/2010)
   Dividends N/A 0.675 0.45
   Revenue $7,493(m) $7,259(m) $6,496(m)
   EPS 1.65 (2/28/2013) 0.97 (2/29/2012) 0.75 (2/28/2011)
   Dividends 0.81 0.675 0.45
   Revenue $7,707(m) $7,640(m) $7,204(m)
   EPS 1.21 (5/31/2013) 1.03 (5/31/2012) 0.92 (5/31/2011)
   Dividends N/A N/A 0.45
August  (FYE)      
   Revenue $7,524(m) $7,288(m) $7,174(m)
   EPS 1.01 (8/31/2013) 0.88 (8/31/2012) 0.91 (8/31/2011)
   Dividends 0.93 0.81 0.675
   Revenue $30,394(m) $29,777(m) $27,352(m)
   EPS 4.93 3.84 3.39
   Dividends 1.74 2.16 2.025

The dividend increase is particularly attractive for this growth company. The company has been focused on increasing shareholder value. It has been aggressively repurchasing outstanding shares, reducing outstanding shares by roughly 27% over the last 10 years. 

The market overreacted to Accenture's earnings report this past summer. Even with slower growth and downward revision of year-end expectations, Accenture was a solid "buy" and a 14% drop in value was extreme. This fall's earnings report confirmed that, but the stock is still trading roughly 10% below where it was earlier this summer. This provides good value for the willing investor.

Even discounting Accenture's history of healthy growth, the stock is attractive for its commitment to shareholder value. Dividend increases and phenomenal EPS growth for a company of this size prove this. Accenture is a good buy for investors seeking growth and an income investment.

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