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IT vs ACN: Which Consulting Services Stock is Better Placed?

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The consulting services industry is firmly tied to manufacturing and non-manufacturing activities that are currently benefiting from strength in the U.S. economy.

The Purchasing Managers' Index (PMI) measured by Institute of Supply Management (“ISM”) reached 57.7% in October, indicating better economic activity in the manufacturing sector. This marks the 26th month of consecutive manufacturing growth. Also, October was the 105th month of consecutive growthin non-manufacturing activities with ISM-measured Non-Manufacturing Index (NMI) touching 61.6%.

Post the 2017 tax reform, corporate spending has increased with U.S. companies pouring tax savings into growth initiatives. This is spurring demand for consulting services.

The Zacks Consulting Services Industry , which is a stock group within the broader Zacks Business Services Sector, has outpaced the S&P 500 and its own sector in the past year. While the stocks in this industry have collectively gained 9.4%, the Zacks S&P 500 Composite and Zacks Business Services Sector have rallied 1.6% and 4.8%, respectively.

The buoyancy in the space is further confirmed by its Zacks Industry Rank in the top 15% (38 out of the 250 plus groups).

Given this backdrop, let’s do a comparative analysis of two consulting services stocks — Accenture plc (ACN - Free Report) and Gartner, Inc. (IT - Free Report) . Accenture has a market capitalization of $105.6 billion and the same for Gartner is $13.1 billion.

As the stocks carry a Zacks Rank #3 (Hold), we are using other parameters to provide investors a better insight.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price Performance

Gartner has performed impressively on the bourse year to date compared with Accenture and the industry. While Gartner’s shares have gained 18.6%, the same for Accenture and the industry rose 2.6% and 5.4%, respectively.

Earnings Guidance

Earnings growth along with stock price gains is often an indication of a company’s strong prospect. Gartner’s current quarter earnings are projected to grow 7.7% year over year and the same for Accenture are expected to increase 2.8%. 

Looking at the full year picture, Gartner’s earnings are projected to grow 10.3% while that of Accenture are expected to increase 7%.  Thus, Gartner has an edge over Accenture in terms of quarterly and yearly earnings growth.

Estimate Revisions

Estimate revisions serve as an important pointer when it comes to the price of a stock. Based on current quarter and current-year earnings estimate revisions in the past 60 days, Accenture is better placed. The Zacks Consensus Estimate for current quarter earnings increased 1.7% for Accenture, while the same for Gartner declined 8.7%. For the current year, estimates for Accenture remained unchanged and that for Gartner fell 1.9%.

Net Margin

Net profit margin helps investors evaluate a company’s business model in terms of pricing policy, cost structure and operating efficiency, and shows how good it is at converting revenues into profits. Hence, a strong net profit margin is preferred by all classes of investors.

Accenture’s TTM net margin of 10.4% is above Gartner’s figure of 8.9% and the industry’s tally of 10.3%.

Valuation

Price-to-earnings (P/E) ratiois a commonly used multiple for the consulting services industry. We observe that Accenture’s trailing 12-month price-to-earnings (P/E) ratio of 23.29is lower than Gartner’s 38.73X and the industry’s 23.87X.

So, Accenture looks quite cheap when compared with Gartner and the industry.

Wrapping Up

Our comparative analysis shows that Gartner scores over Accenture in terms of share price performance and expected earnings growth. However, a faster share price rally led to a positive valuation for Gartner. Accenture has an edge in terms of earnings estimate revision and net margin.

Stocks to Consider

A few better-ranked stocks in the broader Zacks Business Services Sector are Paychex, Inc (PAYX - Free Report) , WEX Inc (WEX - Free Report) and Automatic Data Processing Inc. (ADP), each carrying a Zacks Rank #2 (Buy). Long-term expected EPS (three to five years) growth rates for Paychex, WEX and Automatic Data Processing are 8.5%, 15% and 12.5%, respectively.

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Gartner, Inc. (IT) - free report >>

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Accenture PLC (ACN) - free report >>

Paychex, Inc. (PAYX) - free report >>

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