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Tickers in this Article: acn, be, csc, it, infy, wit, eds, ibm, ul, whr
Whoever said advice is cheap obviously wasn't thinking about global IT consulting giant, Accenture (ACN). Quarter-after-quarter, Accenture keeps on producing hefty sales and cash flows from its advisory and outsourcing businesses. But for all its best-efforts to catch investors' attention -- offering a dividend and buying back loads of stock -- Accenture is largely getting ignored.

There are plenty of reasons to like Accenture. Let's start with its market position. With a market cap of $15 billion and annual sales of $17 billion, Accenture dominates the global consulting business, towering over consulting competitors such as Bearingpoint (BE), Computer Sciences Corp. (CSC) and Gartner Group (IT).

Size means that Accenture can spread its costs over a wider base of revenues, and can complete the really big projects that smaller players are unable to handle.

Accenture offers steady 8-10% growth from North American and European IT consulting markets. Accenture is also positioned to be one of the biggest beneficiaries of the global outsourcing trend.

With the 20% plus growth to be had from offshore outsourcing, Accenture is aggressively building centers in places like India, China, and the Philippines.

Accenture investors get a piece of the outsourcing market, while simultaneously avoiding the sky-high valuations of many Indian-based offshore vendors. Infosys (INFY) and WiPro (WIT) typically sell at multiples of 35 to 50 times earnings. Trading at just 15 times 2007 earnings, Accenture by comparison looks almost like a value play.

Accenture pumped-out a copious amount of free cash flow in the most recent quarter – more than $600 million of it. Even better, the free cash flow number far exceeded Accenture's $235 million net income for the quarter – a reliable indicator that Accenture's earnings are real and not the result of accounting games.

Here's another reason to get excited – Accenture produced a whopping 49% return on invested capital (ROIC) in 2005. To put that number in perspective, a run-of-the-mill IT services company will give shareholders a ROIC of about 10-20%. Accenture's big and growing ROIC tells us a couple of things – management is deploying capital hyper-efficiently and fending off major competitors such as Electronic Data Systems (EDS) IBM's (IBM) Global Services.

Alas, Accenture is not trouble-free. Accenture has been suffering costly glitches associated with a multi-billion dollar IT consulting project with the British National Health Service - NHS, Last quarter, Accenture announced that it will take a charge of $450 million to account for expected losses over the rest of the contract. Investors have been turning their backs on the stock.



Mind you, while further losses from the NHS contract remain a risk, the news of the problem-plagued project hasn't stopped big corporations from signing up with Accenture. Just last month, Accenture inked a $900 million human resources deal with consumer products giant Unilever (UL). This month, it won a five year IT service deal with global home appliance maker Whirlpool (WHR). Even accounting for NHS contract losses, Accenture is set to produce mid-teens earnings growth for the next three years.

It's hard not to think that Accenture is undervalued. With its share price down 21% since the end of March, Accenture stock sells for just 9 times free cash flow. Drawing on its established brand name and a large global network of talent, Accenture should have plenty of opportunities to boost returns further. Accenture could be a gift for investors.

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