Warning creates good entry point at this industry giant
28th June 2023 09:19
by Rodney Hobson from interactive investor
Customers are spending less, but the situation is far from serious, and investors can exploit a drop in share price. Overseas investing expert Rodney Hobson thinks it’s just down to timing.
Warning that your customers are spending less on your products and that you will fall short of expectations in the coming months is always cause for alarm. It could be, though, that the fall in the share price of consultancy group Accenture Class A (NYSE:ACN) has already gone far enough.
Accenture, formerly known as Anderson Consulting and one of the biggest consultancy groups in the world, has admitted that corporate spending on information technology is falling as companies worry over the state of various national economies.
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The United States, where inflation has stuck at higher levels than expected and more interest rate rises could be on the cards, is of particular concern but Europe, where the central bank has been slow to react, and the UK, where inflation is persistently high, may present greater problems in the longer term.
Fortunately, the slowdown in IT spending is mostly on smaller deals so far but the problem could easily snowball. Even in the best-case scenario it will take several months for confidence to return, and spending postponed now is probably lost forever as far as suppliers are concerned.
The situation so far is, however, far from serious. Accenture still managed to raise revenue by 3% to $16.56 billion in the three months to 31 May, its third quarter, and net profits shot up 13% to just over $2 billion. Both figures easily beat analysts’ expectations.
According to chief executive Julie Sweet, this was due to solid bookings and strong operating margins, which resulted in a stream of free cashflow.
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However, Accenture said that in its fourth quarter to the end of August revenue is likely to show only a small rise year-on-year and to fall slightly short of analysts’ forecasts of $16.35 billion. Profits should continue to rise faster than revenue.
To its credit, the company clearly saw the difficulties coming and took early action to mitigate the effects. In March it announced plans to reduce its workforce by 19,000, about 2.5% of the payroll, over 18 months.
About half the jobs lost are in administrative or support functions rather than in direct contact with customers so, although the layoffs will cost $1.5 billion, they should result in considerable savings without affecting the level of service, which was boosted through the hiring of 100,000 people in 2021-22. A streamlining of the workforce is thus a positive move, especially as wage inflation has become an issue.
The use of office space will also be streamlined, although this will mean a one-off cost of $300 million.
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A commitment to create 3,000 technology jobs in the UK, half of them outside London, over three years still stands, but there is clearly scope to reduce this programme, or put it on hold if circumstances worsen further.
News of the possible slowdown knocked 3.8% off Accenture shares. They peaked above $400 at the end of 2021 when investors got rather carried away after the slump during the Covid-19 pandemic. They are now back to a much more realistic level around $300, having found a solid floor at $250.
Source: interactive investor. Past performance is not a guide to future performance.
The fundamentals are admittedly still challenging, with the price/earnings ratio somewhat hefty at 26.6 and the yield less than overwhelming at 1.45%, even after a 15% increase in the dividend.
Hobson’s choice: More adventurous investors should consider buying while the shares are below $320, which could be a resistance point in the short term until orders start to flow in again, which they surely will do in time.
More cautious investors may prefer to risk missing out and wait to make sure the shares really have settled, but the case for buying will become more pronounced if the shares do slip to $280.
Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.
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