Outsourcing may still get a bad rap, but the fact remains that it's a major growth market around the world today, and Accenture (NYSE:ACN) continues to reap the benefits. At the same time, the company is hardly suffering in its consulting business. While the market has caught on to some of the value in this story, investors should yet expect to see further gains from this stock.

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Good Second Quarter Numbers
Accenture reported that revenue grew 12% as reported or 13% in local currency. Outsourcing was again the growth leader, as revenue rose 19%. Consulting was a laggard, but still saw top-line growth of 8%. Revenue in the core Americas region climbed 13%, and the company saw solid growth across its addressed industry groups.

Profitability was likewise solid. Although gross margin eased a bit (down 60 bp), operating income rose 15% as the company spent less (as a percentage of revenue) on both sales/marketing and corporate expenses.

Mixed Messages in The Bookings
On the whole, the company's bookings numbers were decent. Outsourcing bookings rose 8% and the company produced a very solid 1.29 book-to-bill. Consulting was less impressive, as bookings fell 4% from last year, but the book-to-bill was still positive at 1.07.

The strength in outsourcing is not surprising. While it's not widely popular, the reality is that people say one thing and do another - customers reliably go with low-cost providers and outsourcing is one of the best (or at least easiest) ways for enterprises to reduce costs. Though Accenture does have some challenges in competing with lower cost providers like Cognizant (Nasdaq:CTSH), Infosys (Nasdaq:INFY) and Tata Consultancy, particularly in recruiting/retaining employees overseas, Accenture is nevertheless more than holding its own here.

Consulting Still a Long-Term Honey Pot
Accenture's outsourcing business is certainly important, but I believe the consulting business is the more valuable asset (or at least the asset that's harder for a competitor to replicate). Accenture benefits from having a deep talent pool across its industry silos, and its leadership tends to be pulled from long-time employees - a circumstance that perpetuates a differentiated culture. At the bottom line, this makes Accenture a gold-star option in consulting, alongside IBM (NYSE:IBM), and that's a non-quantitative factor that really supports a lot of Accenture's value.

That said, there's at least one downside to Accenture's consulting business - it doesn't carry the same strong margins. Outsourcing is about producing comparable results at lower costs, but consulting is simply a more expensive service to provide, given the expertise and value of the employees involved. That said, while Accenture doesn't stack up as well as the Indian outsourcing specialists in terms of margins, the differences in returns on capital are less pronounced.

The Bottom Line
's (Nasdaq:ORCL) recent results are encouraging with respect to the overall health of the IT market, and Accenture's bookings numbers support the idea that overall market conditions are still pretty healthy.

Accenture may not look all that cheap on the basis of backward-looking multiples, but the cash flow picture is more encouraging. Even if competition (for customers and employees) limits Accenture's ability to significantly boost its free cash flow conversion rate, high single-digit free cash flow growth should be in the cards, and the stock's fair value likely sits north of $80 a share.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  2. Entrepreneurship

    Top 10 Side Jobs You Could Start Now

    Ways to make extra cash in your spare time.
  3. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  4. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  5. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  7. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  8. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  9. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  10. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!