Wednesday, December 09, 2009

Accenture (NYSE:ACN) : Downgraded to Hold following cautious checks - Kaufman

I wanted to highlight a rather interesting call this morning from Kaufman Bros. The firm is downgrading Accenture (NYSE:ACN) to a Hold from Buy with a price target of $43 (prev. $41).

Firm notes they are downgrading Accenture ahead of the November quarter (fiscal 1Q10) earnings call scheduled for December 17. Accenture shares are up 30% since September 1 and have rallied 16% since the last earnings call in early October, when the company reported modestly weak results but cited a "remarkable pick-up" in consulting deal activity in September, a plan to begin hiring again and an improved U.S. demand backdrop even as Europe remained mixed. A key issue is whether the uptick in deal activity in fact converted to bookings during fiscal 1Q10 and whether this uptick can carry through into 1H10. Kaufman reached out to multiple industry sources last week to check on these issues.

The feedback pointed to a pace of recovery best characterized as modest, not "remarkable." The consensus was that more clients are moving forward with consulting and systems integration projects (57% of Accenture's mix) that were shelved during much of 2009, but that the bookings pick-up has been modest to date. Several sources that cited a demand pick-up so far in 4Q09 had limited visibility into their client's 2010 IT budgets and were unsure whether the 4Q09 demand recovery could extend into 1H10. The read-though from Accenture's rivals (IBM, Cap Gemini and CSC) has been mixed to negative in recent months and the feedback from Kaufman's sources inside the larger privately held rivals (E&Y Consulting, AT Kearney) was mixed.

'...One former Accenture partner was hearing more about continued cost cutting at Accenture than about any bookings surge, while another source inside a leading management consulting firm cited stable demand but continued pricing pressure. Not a single source cited a "surge" in bookings in recent months...'

Accenture itself has been clear that the November and February quarters would be "challenging" and that the firm has limited visibility into how quickly the recent deal activity uptick would convert to bookings and revenues. To reach its fiscal 2010 guidance, Accenture needs to post a material revenue growth rate recovery beginning in the May 2010 quarter. Kaufman notes they now have less confidence in this recovery trajectory and are trimming their fiscal 2010 constant currency growth rate estimate to negative 2% from zero. They are assuming Accenture can increase its fiscal 2010 margins by 20 basis points to 13.6%, resulting in a modest decline in their fiscal 2010 GAAP EPS estimate to $2.68 from $2.71.

Accenture shares have moved up since November 1 and now trade at 16x firm's fiscal 2010 GAAP EPS estimate of $2.68. This is the highest forward P/E multiple since late 2007 and puts Accenture's multiple back into the range of 15x-20x that investors were willing to pay during the more tranquil 2005-2007 period. A continued march toward $50 would require the P/E multiple to expand to 18x-19x, which, in Kaufman's judgment, may be tough given that the fiscal 2010 growth outlook of roughly zero pales in comparison to the growth rate of 15%-20% that Accenture posted during fiscal 2007 and fiscal 2008. Given the recent increase in the market and peer group multiples they are raising their price target modestly to $43 from $41, based on an assumed multiple of 14x their fiscal 2011 EPS estimate of $3.00.

Notablecalls: This is something I would call equity research. KBRO's IT Services & Software team went out, did their checks and discovered new info. They compared the new findings to consensus expectations and found a potential gap. That's how it should be done.

OK, let's face it - KBRO isn't exactly a powerhouse everyone is listening to. They are not Morgan Stanley. The client base is probably quite small and doesn't have the power to move stocks around in a jiffy. But their findings are interesting nonetheless.

The call comes about 3-4 weeks ahead of earnings, which adds some additional weight to the call.

I think ACN will trade down following this downgrade. The stock has made a nice upside move since March and people will want to book some profits. Especially ahead of Jan. KBRO gives them reason to.

Just remember that ACN isn't exactly a mover. You won't be booking a 1pt+ profit here.

Fine piece of research, though. Next time you want to get the scoop on ACN, I suggest you pick up the phone and call KBRO.

(Can't believe I managed to write this one up w/o any Tiger jokes!)


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Sam said...

This is on Goldman's conviction buy list with a $50 PT, which they raised from 47 just yesterday. Just sayin'

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