Interactive Investor

Buy this solid $200bn stock when it does this

This big hitter faces headwinds, but profits are holding up, it’s generating lots of cash and the shares have risen since overseas investing expert Rodney Hobson tipped them this summer. He also updates his view of the big American oil companies.

11th October 2023 09:23

Rodney Hobson from interactive investor

    It has been a tough few months for Accenture (NYSE:ACN) but we cannot say we were not warned by management earlier this summer. The American-Irish consultancy and IT provider still has excellent long-term potential for investors who are prepared to be patient.

    Results for the three months to the end of August, the final quarter of Accenture’s financial year, showed revenue up 4% year on year to $16 billion. That’s not a bad result given that the strength of the dollar chopped the growth figure in half, but a little short of analysts’ forecasts. However, adjusted earnings per share improved by a very respectable 14%, which was better than expected.

    Health and public services fared best of the five major markets that the group serves, probably because work in this sector continues unrelenting even in tougher economic times. Other sectors such as communications, media and financial services are more at the mercy of discretionary spending and slower decision making.

    Chief executive Julie Sweet admits that the headwinds will continue into the current financial year to next August. Although she expects revenue to rise by up to 5%, that will be down on the 8% growth seen over the past 12 months and will be provided mainly, perhaps entirely, by acquisitions. Organic growth could well be zero.

    The reason why profits are holding up is that Accenture has very sensibly cut costs to protect margins. The impact has been admittedly brutal, with 19,000 employees, 2.5% of the workforce, sacked and 13,000 additional jobs automated, with workers being taught new skills and switched to other jobs where possible. Operating margins thus improved by about 15% over the past financial year and will probably do the same in the current year.

    More good news is that $9 billion was generated in free cash flow in the past year, including $3.2 billion in the latest quarter. Nearly half the annual total was spent on share buybacks and $2.8 billion on dividends, with the payout raised by 15% in the latest quarter. There should be a similar huge cash flow over the current year and even more will be spent on buybacks. Expect an increase in the dividend as well, although that may have to wait until next September.

    The shares got caught up in the post-pandemic surge among tech stocks and peaked at an unrealistic $400 at the end of 2021. Then came an overcorrection to around $250 before they settled just above $300. The price/earnings ratio is still demanding at 29, while the yield is only 1.4% despite the dividend increases.

    Source: interactive investor. Past performance is not a guide to future performance.

    Hobson’s choice: I suggested three months ago that there was a solid floor around $250. In fact, the floor now seems to have been established at $300. On the debit side, the shares are not likely to break above $325 until there is more positive news on revenue.

    Existing shareholders should certainly hold on. The case for buying has become less strong but if the opportunity to get in below $305 comes round again, take it.

    Update: The turmoil in Israel, with fears that oil and gas supplies from the Middle East could be disrupted, has had an inevitable impact on energy shares. The price of Brent crude oil, which had been weakening of late, surged by $4 to $88 a barrel, and hopes of a rapprochement between Saudi Arabia and Israel have been scuppered, along with the expectation that the Saudis would increase their output of crude.

    Exxon Mobil Corp (NYSE:XOM) gained $3 to $111 and Chevron Corp (NYSE:CVX) $5 to $166 on the day after Hamas launched its attack from Gaza, but they may already be easing back. I repeat my advice of 2 August for shareholders to stay in and keep collecting the dividends.

    Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.

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