Accenture shares rise on earnings beat

In September 2008, I argued that the story with Accenture would be one of operating margin expansion, as reduced turnover would lead to lower recruiting costs and more efficient operations. Two items of note from this earnings release were that attrition in the quarter ran 8% annually, as opposed to 16% annually in the comparable quarter, and operating margins expanded another 10 basis points. Operating margins have historically run in the 10% to 12% range, so this represents a great improvement in a tough economy.

Accenture firmed up their expectations for the rest of the year, saying that EPS should be between $2.67 and $2.70 -- above prior guidance -- with free cash flow between $2.4 billion and $2.6 billion. The firm's healthy balance sheet has no long-term debt and now holds more than $4 billion in cash, or about $6 per share. Once you subtract out the cash, shares are trading at 10x earnings. Using a similar process and considering free cash flow, the entire company, ex-cash, changes hands for 6.5x FCF.

The valuation multiples being given to Accenture, coupled with an analysis of its balance sheet, suggests a stock with low-to-mid double-digit return potential over time. This makes it one of the better deals I've seen in the market for a large-cap company with a good (though not great) business model. I continue to believe that Accenture is inexpensive relative to its earnings power, and a good play on any economic environment.

James Cullen also edits and writes at CollegeAnalysts.com. He is the Vice-President of the Boston College Investment Club, which owns ACN, but has no personal position in the stocks mentioned above.