This Just In: Upgrades and Downgrades

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At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

SocGen says "sell" Accenture
As you may have heard, Accenture (NYSE: ACN  ) reported its fiscal first-quarter earnings last week. And how did it do? It depends on whom you ask.

Reuters said the company was "upbeat" on its future prospects, but The Associated Press called Accenture's guidance "disappointing." Barron's notes that revenue and earnings were slightly ahead of expectations in Q1, while Zacks seemed obsessed with Q2 -- calling the company's sequential growth prediction weak not once, not twice, but three separate times.

Meanwhile, over in analyst-land it appears the "glass half-empty" arguments are carrying the day. French investment bank Societe Generale confirmed Monday that it's withdrawing its hold rating on Accenture stock and recommending investors sell the shares.

I couldn't disagree more.

The trouble with Europe (and analysts)
Most of the commentary I've read, written by Accenture bears, focuses on the company's exposure to Europe -- not to any particular "sick man of Europe," but to the entire terminally ill continent. But really, folks, if it's Europe that scares you, what stock wouldn't you be afraid to buy? Everybody who's anybody does business there; Accenture is no exception.

Indeed, if there's one thing that encourages me more about Accenture than anything else, it's the exceedingly low expectations investors seem to have for this company. Pegged for 10% growth over the next five years, Accenture is happily free of the "IT outsourcing" hype that has investors demanding 15% to 20% growth from the likes of Infosys (Nasdaq: INFY  ) or Cognizant (Nasdaq: CTSH  ) .

At the same time, the growth people do expect to see at Accenture compares well to the depressing, single-digit growth prospects at also-ran IT consultants Hewlett-Packard (NYSE: HPQ  ) or Dell (Nasdaq: DELL  ) for example (both pegged for 4%-5% growth), and is almost at the level of IT consulting star IBM (NYSE: IBM  ) (11%).

Growth and value
At the same time, though, Accenture's low expectations bring with them an enticingly low share price. The stock costs about 16 times earnings at today's prices. And while that seems more expensive than IBM, it really isn't.

Consider: Unlike IBM, which carries nearly $20 billion in net debt on its balance sheet, Accenture is essentially debt-free, with $5.7 billion worth of cash in the bank vastly outweighing its mere $4.4 million in debt. The company also generates far more free cash flow, as a percentage of net income, than does IBM. While claiming only $2.4 billion in net income over the past 12 months, Accenture actually generated $3.4 billion in free cash. As a result, it sports an enterprise-value-to-free-cash-flow ratio of just 8.4, versus IBM's EV/FCF of 15.4.

Foolish final thought
The way I calculate it, an 8.4 EV/FCF on a 10% grower like Accenture works out to about a 16% discount on the stock. But if getting the chance to buy a dollar for $0.86 isn't a good enough deal for you, consider that Accenture pays its shareholders a tidy 2.5% dividend yield. That's money in the bank, year in and year out, that you get to collect while waiting for Mr. Market to wake up and charge a more appropriate price for the shares.

To me, this is quite a nice bargain investors are being offered. While Societe Generale says to sell the shares, I think you're better off buying. And in fact, I'll put my reputation where my mouth is. Right now, I'm heading over to Motley Fool CAPS to mark Accenture down as an "outperform." Feel free to follow along if you like -- and hold me accountable if it turns out I'm wrong.

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Fool contributor Rich Smith does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 352 out of more than 180,000 members. The Motley Fool has a disclosure policy.

The Motley Fool owns shares of IBM. Motley Fool newsletter services have recommended buying shares of Dell and Accenture. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Read/Post Comments (1) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 21, 2011, at 11:30 AM, NCMichael wrote:

    I think Rich makes some good points and agree that ACN is a good buy. Additional points to his arguments is the low Beta and solid although maybe not stellar long-term performance of the stock.

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