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Accenture: Performance Delivered

By Ben McClure
January 10, 2005

Is Accenture (NYSE: ACN) on a roll? At first glance, it looks like it. The information technology consulting and outsourcing giant delivered fiscal first-quarter results last Thursday after the closing bell that beat Wall Street profit and sales estimates, driving the stock price up more than 5% to $26.61.

Indeed, the results look good. Accenture posted profits of $196.3 million, or $0.32 a share. That's up from $174.3 million a year ago. Meanwhile, total revenue jumped 14% to $4.07 billion.

With headline numbers like that, it's hard to squabble with the market's enthusiasm for Accenture. But looking a bit more closely, there are reasons to be cautious before snapping up more of the stock at today's price.

Accenture's contract bookings offer a telltale sign of future revenue growth. Watch out. Bookings were down significantly in the quarter to $4.03 billion from $5.05 billion in the first quarter of 2004. Contract announcements were scarce this December, so Accenture will need to produce an extraordinarily big list of contract wins this month and next to maintain top-line growth levels from last year.

Outsourcing is supposed to represent the future of companies like Accenture. Yet, on the conference call with investors, CEO William Green said that, while outsourcing contracts would continue to increase, the rate of growth could slip from 2004 levels.

Also, be wary of the profit margin squeeze. Accenture blamed its shrinking gross margins -- down to 33% from 34.1% last year -- on bigger bonuses for its high-paid consultants this quarter. Management explained lower margins in the previous quarter the same way, which suggests that ballooning compensation is becoming a trend. At the same time, Accenture's move into challenging "pay-for-performance" contracts could also put pressure on profit margins in the quarters ahead.

Sure, among the publicly traded consulting groups, Accenture is arguably the cream of the crop. In an improving IT spending environment, that certainly counts for a lot. But call me finicky: The stock trades at 20 times 2005 earnings. While that's not expensive, it isn't cheap either given its growth prospects. Competitors such as Computer Sciences (NYSE: CSC) and BearingPoint (NYSE: BE) trade at the same levels, but analysts expect them to grow at least 10%. Accenture doesn't look like a great bet right now, given the competition and the company's own challenges.

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Fool contributor Ben McClure doesn't own shares of any companies mentioned in this article.