Thursday, 17 December 2015

Earnings updates: Accenture and General Mills

It may be just over a week until Christmas...but those corporate results keep on rolling.  Today in the US larger cap zone it is the turn of Accenture and General Mills.

I have not actually formally reviewed the consulting and business process related company Accenture before on Financial Orbit.  This is probably because I am not that convinced by such a business influenced by my occasional interactions with such organisations where I have a constant prevailing feeling that too much is 'taken off the shelf'.

Anyway Accenture does appear in relative rude health with today's quarterly update making all the right noises in terms of expanding margins, raising revenue outlook and confirming the outlook for EPS.

On the conference call there was some talk about business process outsourcing being a particular strength along with the breadth (and hence cross-selling potential) of their offering.  I always want to look at their sector-level (i.e. their end clients) insights.  On this point communications, media, technology and financials were particular positive standouts...whilst resources (no surprises), health and public services were less compelling.  

Still - and despite slightly greater FX losses - Accenture feel comfortable enough to edge up revenue hopes.  But what I am struck by more are the operating margin and free cash flow comments:


These two statistics allow me to at least put Accenture into a valuation corridor.  A just sub x12 EV/ebit and a c. 5% free cash flow yield hardly sounds a disaster for a global leader in their line of business.  With a strong balance sheet (net cash) even I admit - given my sector thematic scepticism - a slide south of that law-of-round-numbers US$100 level is worthy of note.


Now onto General Mills who I have reviewed before.  Back in July I noted that 'around US$50 is the first time I will be looking at General Mills' stock as a potential long - and above US$60 as a potential short' 

And how has the stock traded since then?  Well pretty sideways in the middle of that range:


So what about the last quarter?  No surprises there has been a FX hit but the (negative) volume and (positive) price-mix is strikingly dull...


...and that was driven by the company's US retail segment which remains volume-based dull/poor: 


The contrast with the international division is marked.  Now - of course - there has been FX hits for this division but this is on an underlying basis impressive.


However the international division is not even a quarter of the size of profit generation compared to the US retail business.  

What this means is that the focus on cost savings remains absolute.  Clearly the capturing of such opportunities would potentially be very nicely accretive.  


But the reality is that corporate momentum remains mixed (and blurred of course by the divestiture of the Green Giant brand).  
 Net net it feels to me that retaining the aforementioned US$50-60 range - at a low teens EV/ebit multiple - remains the sensible range for investors to consider buying/shorting at.  As I noted in July the shares do have good shareholder remuneration capability but for my more balanced investor profile I want to see a c. US$50 share price before I get interested.

Two very differences but the same conclusion: specific levels matter.

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