Accenture (ACN) reported second quarter results that caused its stock to drop 3-4% this morning.
Accenture’s organic sales grew 6%, and adjusted earnings per share were roughly flat compared to the prior-year period.
The company’s sales and earnings were roughly in line with analysts’ estimates heading into the quarter.
Management expects full-year revenue growth of 6-8%, which is slightly higher than its previous forecast of 5-8% growth.
Accenture also increased its adjusted earnings per share guidance to $5.70 to $5.87 from $5.64 to $5.87.
Accenture’s shares hit an all-time high earlier this week before selling off today and have roughly kept pace with the broader market over the last year.
Why did the stock fall on this earnings report? Stocks that have enjoyed a strong price run-up sometimes drop on good news as traders take profits.
Accenture’s stock trades at a relatively high P/E multiple (although not an excessive level) and had about doubled the S&P 500’s year-to-date return through yesterday, making it more vulnerable to some profit taking unless the company really delivered knockout earnings and guidance.
Is It Noise or News?
One of the most important investing habits to learn is the ability to distinguish between noise and news. There is no shortage of financial news every second of the day, but very little of it ever affects a company’s long-term earnings outlook.
When a stock drops in price, it’s important to take a slow, rational approach to understanding why the stock is down. If the reason doesn’t seem to impact the company’s long-term prospects, it could be a buying opportunity.
These aren’t always easy judgment calls to make, but Accenture’s weak stock price response to the company’s earnings release seems like noise to me.
The company’s fundamentals remain strong across the business, and management even slightly increased guidance for the year.
Most importantly, Accenture’s digital, cloud, and security services growth engines now account for over 45% of revenue and continue growing at a double-digit clip.
The only real issue I can see with the stock is valuation. ACN’s stock trades at a forward P/E multiple of 21.6, which represents a meaningful premium compared to the S&P 500’s forward P/E multiple of about 18.
Accenture’s higher multiple reflects the company’s superior business quality and faster earnings growth profile, which both seem intact to me.
I think the stock remains a quality holding for long-term shareholders, but it would take another 5-10% pullback in the stock to make me interested in adding more to my position.
Few companies can match Accenture’s high Dividend Safety & Growth Scores. The company last increased its semi-annual dividend by 10% in September 2016 and should continue rewarding dividend growth investors with strong payout increases for many years to come.
My long-term thesis on Accenture can be seen here, and I continue to believe that the company’s best days remain ahead of it.