Ever since Motley Fool Inside Value pick Accenture (NYSE: ACN) made a provision of $450 million for future losses related to its contract with the UK's National Health Service (NHS) during its fiscal second quarter, the $4 billion contract has been a monkey on the consulting giant's back. Investors legitimately considered it a source of unwanted uncertainty. So when the professional services giant announced on Thursday that it was transferring the contract to Computer Sciences Corporation (NYSE: CSC), it was a fine way to cap the end of a solid fiscal year. (In the following discussion, all comparisons refer to the prior-year period).
Although fourth-quarter net revenues of $3.97 billion were up only 1%, this reflects a $339 million reduction in net revenues relating to the agreement to terminate the NHS contract. Despite the impact of this agreement, fiscal 2006 net revenues increased 7% to $16.6 billion. Consulting is the firm's largest activity at 59% of fiscal 2006 net revenues, but Outsourcing continues to grow at a faster pace, increasing 14% in the fourth quarter, in line with its 13% growth rate for the full year.
Adjusted for share-related compensation expense and the NHS contract, gross margins for 2006 increased by 10 basis points to 31.6%. Operating margins expanded 80 basis points to 12.4%, much of which is attributable to reduced general and administrative costs.
Accenture is a cash-generating machine -- fourth-quarter free cash flow (defined as operating cash flow minus capital expenditures) was $715 million, for a full-year total of $2.36 billion, well ahead of its guidance of $1.8 billion. The company has been diligent about returning some of this cash to shareholders through dividends and value-enhancing share buybacks, with redemptions and repurchases totaling $2.1 billion in 2006 (see Philip Durell's article ''Accent on Accenture's Shares" for more on this point). On Aug. 31, Accenture still had authority to make repurchases worth $1.9 billion. Finally, the company sports a pristine balance sheet with no debt to speak of and $3.4 billion in cash and equivalents.
Looking forward, the company expects that the resolution of its matters with the NHS will lift 2007 EPS by $0.02, with a forecasted range of $1.77-$1.82 (for a forward P/ E range of 17.4-17.9, based on last Friday's closing price of $31.71). Free cash flow is expected to be between $1.6 billion and $1.8 billion. Notwithstanding the setback with the NHS, all operating groups are growing. Geographically, Asia Pacific appears to present a real area of opportunity. Although the region accounts for just 8% of 2006 revenues, it grew at 20% in local currency terms, outstripping increases in the Americas and EMEA.
Accenture's stock has had a pretty good run this year, gaining almost 10% versus 1.3% for the Credit Suisse First Boston Technology Index. Although I don't find the shares particularly compelling at this level, I have to admit this company is best-of-breed, generating prodigious cash flow. With none of its peers standing out as obviously more attractive, investors who wish to own shares in a professional services firm could certainly do worse than to back this racehorse.
|
Forward P/ E*
|
PEG Ratio*
|
|
Accenture (NYSE: ACN)
|
17.3
|
1.18
|
|
Bearing Point (NYSE: BE)
|
25.4
|
2.03
|
|
Computer Sciences Corp. (NYSE: CSC)
|
11.9
|
1.13
|
|
IBM (NYSE: IBM)
|
14.0
|
1.27
|
|
Industry (Management Services)
|
20.5
|
1.51
|
*Based on closing prices on 09/29/2006.
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Fool contributor Alex Dumortier has no beneficial interest in any of the companies mentioned. He welcomes your (constructive) feedback. The Motley Fool has a strict disclosure policy.
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