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
Oracle
'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

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
  2. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  3. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  4. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  5. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  6. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  7. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  8. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  9. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  10. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
RELATED FAQS
  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 >>
COMPANIES IN THIS ARTICLE
Trading Center