A family limited partnership connected to Accenture Plc (NYSE:ACN) officer Stephen Rohleder purchased 20,000 shares of the company’s stock on July 2nd at an average price of about $72 per share. Rohleder also owns a little over 30,000 shares of Accenture Plc (NYSE:ACN) directly according to the Form 4. Studies generally show that stocks bought by insiders exhibit a small outperformance effect (read our analysis of studies on insider trading). We would explain this finding through the fact that insiders already have an economic connection to the company, and so should be reluctant to buy shares (and therefore increase their company-specific risk) unless they are particularly confident in the stock price.
The third quarter of Accenture Plc (NYSE:ACN)’s fiscal year ended in May 2013, with the company recording little change in revenues either for that quarter or for the first nine months of the FY compared to the appropriate year-ago period. Earnings have been up at a high rate in percentage terms- 18% in its most recent quarter compared to the third quarter of the last fiscal year- but in taking a closer look at the 10-Q that seems to have been primarily due to the combination of a lower effective tax rate and net benefits from corporate reorganization, which would not be sustainable sources of growth. The current market capitalization of $48 billion results in a trailing earnings multiple of 17, a valuation at which we’d need to see a way for net income to increase going forward; aside from these two factors, growth prospects on the bottom line seem limited particularly with revenue being slack.
In addition to insider trading activity, we track 13F filings from hundreds of hedge funds and other notable investors. We primarily use this information to help us develop investing strategies (for example, we have found that the most popular small cap stocks among hedge funds outperform the S&P 500 by an average of 18 percentage points per year) but can also use our database to track interest in individual stocks. We can see that Cliff Asness’s AQR Capital Management initiated a position of 1.3 million shares in Accenture during the first quarter of 2013 (see more of Asness’s stock picks). Lansdowne Partners, a hedge fund managed by Steve Heinz and Sir Paul Ruddock, had Accenture Plc (NYSE:ACN) as one of its largest positions as of the end of March (find Lansdowne’s favorite stocks).
Other IT services companies include International Business Machines Corp. (NYSE:IBM), Wipro Limited (ADR) (NYSE:WIT), Computer Sciences Corporation (NYSE:CSC), and Gartner Inc (NYSE:IT). There’s a fairly wide range in these companies’ valuations; for example, IBM and Computer Sciences both trade at 11 times forward earnings estimates, pricing them at a considerable discount to Accenture Plc (NYSE:ACN) on that basis. These two businesses have been a bit more troubled than Accenture, with revenue declining moderately in their most recent quarterly report compared to the same period in the previous fiscal year in each case. However, they might be worth looking into on the basis of their low multiples.
Both Wipro’s trailing and forward earnings multiples come in at 15, as Wall Street analysts expect stagnant financials from the company; we’d note that Wipro would have to eventually improve its net income in order to be a buy at this price, and so we’d avoid it for now based on the sell-side’s pessimism. Gartner has been experiencing growth, going by recent reports, but markets have bid up the stock price so much that the forward earnings multiple is 25. As a result it’s too expensive to interest us at this time.
Valuations seem high in quite a few cases in this industry, and assuming that Accenture Plc (NYSE:ACN) doesn’t have a path to at least moderate earnings growth over the next several years- and its recent report suggests that it won’t, as recent results have been boosted by tax rates and reorganization benefits- we don’t think that this is a good insider purchase to imitate. IBM and Computer Sciences are cheap, at least, but we’d noted that they have not been performing well recently.
Disclosure: I own no shares of any stocks mentioned in this article.
