Accenture Is the King of Cost Cutting

"WHAT DOES NOT CHANGE IS THE WILL TO CHANGE," wrote the American poet Charles Olson -- and that idea helps explain the stunning growth of Accenture . The company, a leader in management consulting and technology outsourcing, profits handsomely by helping big corporations change continually to meet the demands of their markets.

Lately, the change that's often required is downsizing -- layoffs and other cost cutting. Grim as that may be for the companies and their workers, it's hardly bad news for Accenture: It has been posting double-digit growth in revenues and earnings ever since the credit crunch began last year.

With corporate downsizing accelerating, Accenture has been posting double-digit growth in sales and profits.

Trouble is, the success of the Bermuda-based company, formerly the consulting arm of the now defunct Arthur Andersen, is little known among investors. Despite television ads featuring Tiger Woods, the company "just can't get credit for what they've been doing," says Tim Fidler, a large-cap portfolio manager at Ariel Investments in Chicago. And that's an opportunity for investors.

Accenture (ticker: ACN), one of Ariel's largest positions, trades at just under 14 times Fidler's estimated earnings for the coming 12 months of $2.85 a share, much less than the 18 times forward earnings Hewlett-Packard (HPQ) recently agreed to pay for the less-well regarded outsourcer EDS (EDS), and well below Accenture's peak multiple of about 20.

Fidler figures that Accenture, with a pristine balance sheet and cash and short-term investments of an impressive $3.4 billion, has an intrinsic value of somewhere in the high 40s, about 20% above its recent price of about 39.

Accenture, with a market capitalization of $30 billion, serves more than 90% of the Fortune Global 100, offering both strategic advice and hands-on assistance.

Like their brethren at McKinsey, Accenture's nearly 15,000 management consultants help businesses and governments implement strategic plans to improve such things as customer relationships, finance and performance management.

It also takes on an outsourcing role for companies to help them lower costs, assuming responsibility for such functions as human resources, finance and information technology. Like EDS, it also handles IT-infrastructure outsourcing.

Unimpressive Performers: Accenture's shares, though up from a few years ago, are trading well below their peak P/E of 20 and the multiples of rivals.

Accenture is the "blue-chip company" of information-technology services, says analyst Bryan Keane of Credit Suisse, who rates the company an Outperform. Its results have outshone those of a group that includes International Business Machines (IBM). In Accenture's fiscal third quarter, ended May 31, revenues jumped a full 20% and earnings per share surged 36%, to a quarterly record of 74 cents a share. The outlook remains surprisingly strong, with new bookings hitting $6.77 billion during the last quarter, including a record $3.98 billion of consulting bookings.

CEO William Green has said clients are looking to enter new markets, lower costs, manage increased levels of risk and "tackle the headwinds" of the economy. "That is the stuff that makes our business go," he said during the company's third-quarter conference call.

THE TRENDS DON'T APPEAR TO BE SLACKENING. In late June, Accenture once again raised its outlook for revenue growth in the fiscal year ending Aug. 31, to the upper end of its previously announced 9%-12% guidance in local currency, and its forecast for diluted EPS to $2.63 to $2.65, from its previous range of $2.55 to $2.60.

CEO Green said in the conference call that "we feel better looking at '09 than we felt this time last year when we were looking at '08."

Jim Stratton, portfolio manager and chief investment officer of Stratton Multi-Cap Fund, has been adding Accenture recently and now has about 2% of the fund in the stock. He likes the long-term track record in earnings growth, and recent acceleration. He notes that Accenture has little downside risk because of its geographic mix of business -- 44% domestic and 56% international.

While Fidler of Ariel Investments says that consulting is sometimes one of the first things to be cut during a recession, "Accenture projects are typically mission-critical to an organization."

And unlike its competitors, the same Accenture professionals who are selling projects to customers later help with actual work on the project. That's one reason, Fidler says, that Accenture's win rates are so high. "There's an amazing esprit de corps around Accenture," he says. "It's a culture that takes its brand and its reputation very seriously."

That discipline, and the transformational quality of Accenture's work, should go a long way toward transforming its stock price ever higher.