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Analysis of Accenture’s FY2001/1Q02 Business Results

Stock Up on Bad News!

Investment Cashflows, Not Business Results, Rule the Day on Wall Street

PHOENIX, Jan. 10 - Care to guess IT services stock is a hands-down winner since Sep. 11, the day that pushed defense and security companies into the limelight? 

Text Box: Found his backhand?
Joe Forehand
Computer Sciences Corp. (CSC), with its huge ($2.7 billion) federal government portfolio?  (see Annex Bulletin 2001-07, Mar 26, 2001).  No.  To be sure, CSC has done well, with its stock advancing from the low $30s to the low $50s.  But no cigar.

Electronic Data Systems (EDS), with the largest federal government outsourcing contract ever awarded? ($6.9 billion - see “EDS Takes Over U.S. Navy,” Oct 10, 2000).  No.  Neither that, nor the subsequent EDS “megawins” impressed Wall Street sufficiently to award it the top billing, although EDS shares also soared - from the low $50s in early September, to a 12-month high of $72.45, set on November 27.

And, of course, IBM could not have taken the top honors, as the Big Blue had the “foresight” to get out of the federal government business back in 1994 (!?), when it sold its Federal Systems Division to Loral Corp. (see Annex Bulletin 94-06, Jan 25, 1994).  Ever since, the company has been playing second fiddle to other IT general contractors.

Nor could Cap Gemini Ernst & Young (CGEY) hope to benefit from the increased government spending on defense in the post-911 era, given its relatively small U.S. business.  Plus its stock is traded at the Paris bourse, not at the Wall Street casino.

So which was the IT services company whose stock topped all competitors since Sep. 11? 

That of the newcomer to the stockmarket - Accenture, Ltd. (CAN) - that only went public last July.  After opening at $15 on July 19, and trading close to that price for most of August, the ACN stock took a steep tumble following the Sep. 11 attacks, bottoming out at $11.6 on Sep. 27. 

Text Box: Accenture - newcomer to market - best 
performer since Sep. 11, 2001

But it wasn’t until this Oct. 12 news report… “Accenture Posts 4th-Quarter Loss, Plans Charge Related to Attacks” (Wall Street Journal, Oct. 12)… that Accenture’s share began their unrelenting - CLIMB (?!).  Yes, climb.  That’s how irrelevant actual business results have become to the cashflow, fad and gossip-driven Wall Street.

If in doubt, consider what happened this week.  As ACN released its first quarter results on Jan. 9, the Reuters news wire carried a story about them under the headline, “Accenture Net Falls on Investment Losses.”  The losses led to a $90 million-charge, which reduced the net profit to $81.7 million for the quarter, down from $148.5 million the year before, when ACN was still a private company.

Unfazed, Wall Street sent the ACN stock to a new high! ($28.34 - see the ACN vs. Dow chart).  Since going public, ACN stock has risen 88%, also outperforming by far the broader S&P 500 index, which fell 4% during the same period.

And you can’t blame the ACN executives for Wall Street’s lack of logic, either.  Unlike some companies that tend to over-hype their own achievement, the ACN chairman and CEO, Joe Forehand, sounded quite modest, even cautious in his remarks to Reuters.  He said the company was not pinning any hopes on a strong economic recovery this year to boost tech-sector spending by companies that, in turn, will spur demand for IT services.

“Given that our overall market is based on capital spending rather than consumer spending, it's hard to say there's a strong pickup,” Forehand told Reuters. “Though I feel better now than I did four or five months ago, we don't see robustness yet.”

But the cash-flush Wall Street didn’t care.  With some three trillion dollars sitting on the sidelines and waiting for investment opportunities only Forehand’s positive comment resonated.  The ACN chairman said the company had booked $2.3 billion in December, making it the best month in the company’s history.  But the December results were not included in the latest quarterly figures, as they form a part of the company’s second fiscal quarter that ends Feb. 28.

Segment Analysis

Geographies.  The ACN latest actual results from around the world were also flashing signs of caution to prudent investors.  Overall 1Q02 revenues were up only 6%, less than half the growth rate the company recorded in its 2001 fiscal year, ended Aug. 31 (17.3%).

Text Box:

Within this aggregate figure, the revenues in the Americas region declined by 7%, while those in the Asia/Pacific region dropped by 2%.  The only growth area was Europe, where the ACN business grew by 26% compared to the same period a year ago. 

But alas, Europe represents less than 40% of the company’s business.  So as great as the Old Continent is performing for ACN, it is just not big enough to overcome other downward trends.

Text Box:  Industries.  Perhaps not surprisingly, in light of our Sep. 11 comments, the fastest growing ACN segment in the latest quarter was its government business.  After just barely inching past the $1 billion-mark in FY01, and accounting for less than 9% of the total revenue, the 1Q02 ACN government revenues surged by 58%, by far outpacing the growth of any other industry sector.

ACN’s catchall “products” industry segment came in second with a 22% growth rate, while the resources sector (yes, including oil companies), was third, with a 17% growth rate.

Offsetting such positive news, revenues in the communications and high-tech segment declined by 14%, while those in the financial services area dropped by 6%.


We said in our first commentary about the Sep. 11 events, they have proven the vulnerability of the industrial era systems, but also the resilience of the new information era creations (see “End of Folly, Not of World,” Annex Bulletin 2001-18, 9/26/01).  The success that the IT services companies, like ACN, have enjoyed ever since attests to it better than any editorials.

Happy bargain hunting!

Bob Djurdjevic














































Volume XVIII, No. 2002-01
January 11, 2002

Editor: Bob Djurdjevic
Published by Annex Research
e-mail: annex@djurdjevic.com

P.O. Box 97100, Phoenix, Arizona 85060-7100
TEL/FAX: (602) 824-8111

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