Do not worry if you have missed out on prior picks in the tech sector because I have another one for you.
As detailed in our report on tech sector ETFs, tech stocks are far and away the most profitable. That sector’s returns on invested capital (ROIC) stand at 42.3%, which is more than double the S&P500 at 17.4%.
And this week’s stock pick of the week is no exception. Accenture Plc (ACN), one of December’s Most Attractive Stocks, boasts a 43% ROIC. And like all of our Most Attractive Stocks the company has (1) high and rising economic profits (as distinct from accounting profits) and (2) a cheap valuation.
As shown in our free report on ACN, the company’s return on invested capital (ROIC) (43%) is in the top quintile of all the companies we cover and its economic earnings are higher than reported accounting earnings. During its last fiscal year, ACN’s economic earnings rose to $1,801 while accounting earnings rose to $1,781. ACN is one of only 71 companies of the 3000+ we cover whose economic earnings are higher than its accounting earnings. It is quite rare for a company to have higher economic earnings than GAAP earnings given that the accounting rules enable companies to overstate their GAAP profits so easily.
At the same time, the stock’s valuation implies that ACN’s profits will decline by 9% and never grow again. In other words, the stock market is predicting a permanent decline of 9% in ACN’s profits. Given that most investors are not aware that the company’s operating profits are as strong as they are, the market is probably not giving ACN appropriate credit for its profitability.
In summary, the market is setting the profit growth bar quite low for this stock.
- Our discounted cash flow analysis shows that ACN’s current valuation (stock price of $48.59) implies that the company’s profits will decline by 9% and never grow again.
- Economic earnings are higher than reported accounting earnings.
- Excess cash of $3,728mm or about 12% of its market cap
For details on what causes the difference between economic versus accounting profits, see Appendix 3 on page 10 of our report on ACN. See Appendix 4 to learn how ACN increased net operating profit after tax (NOPAT) by cutting costs and increased its NOPAT margin from 9.0% to 9.2%. See Appendix 5 for details on how ACN reduced its invested capital while revenue grew and raised its invested capital turns from 4.68x to 4.75x. Appendix 7 (in the ROIC section) shows how the company’s increase in NOPAT margin and invested capital turns result in an increase in ROIC (from 42.0 to 43.5%).
In summary, ACN is gets our “very attractive” stock rating because its economic earnings are strong and growing while its valuation implies economic earnings will decline permanently by 10%.
ACN fits the risk/reward profile of a great stock to buy.
Note: Stock pick of the week is updated every Tuesday.