Accenture vs. DXC Technology: Which IT Services and Consulting stock is a Better Buy?

Professional services company Accenture plc (ACN) provides strategy and consulting, interactive, and technology and operations services worldwide. In addition, the company offers cloud, marketing, supply chain management, and sustainability services. On the other hand, DXC Technology Company (DXC) provides information technology services and solutions primarily in North America, Europe, Asia, and Australia. It operates in two segments, Global Business Services, and Global Infrastructure Services.

Amid the rising adoption of advanced technologies, the IT services and consulting market is expected to grow exponentially. Moreover, as governments worldwide are reinstating lockdown and travel bans to limit the spread of the highly transmissible omicron variant of the coronavirus, the demand for IT services and consulting is expected to rise further in the near term, owing to increasing dependence on hybrid working models. According to a Gartner, Inc. (IT) report, worldwide IT services spending is expected to reach $1.2 trillion in 2021, representing a 9.8% increase from 2020. Therefore, both ACN and DXC should benefit.

ACN has gained 61.9% over the past year, while DXC has returned 36.3%. Also, ACN’s 53.4% gains year-to-date are significantly higher than DXC’s 22.1% returns. Moreover, ACN is the clear winner with 52% gains versus DXC’s 11.1% returns in terms of the past nine months’ performance.

But which of these two stocks is a better buy now? Let’s find out.

Latest Developments

On December 16, 2021, ACN acquired Zestgroup, a services firm specializing in energy transitions, net carbon-zero projects, and renewables procurement. Nicole van Det, country managing director of Accenture Netherlands, said, "By combining years of deep industry expertise and capabilities, Zestgroup advances our ability to help clients move faster in achieving their carbon emission objectives."

On December 8, 2021, DXC announced a multi-year renewal with Copa Airlines, a leading Latin American airline carrier, to modernize the mainframe-based Passenger Service System and migrate it entirely to the public cloud without business disruption. Jim Brady, president, Americas, DXC, said, "We are delighted to be awarded another large-scale cloud transformation."

Recent Financial Results

ACN’s revenue increased 27% year-over-year to $15 billion for the fiscal first quarter ended November 30, 2021. The company’s operating income grew 29% year-over-year to $2.43 billion, while its net income came in at $1.82 billion representing a 19.7% year-over-year increase. Also, its EPS came in at $2.78, up 20% year-over-year.

DXC’s revenues decreased 11.6% year-over-year to $4.03 billion for the fiscal second quarter ended June 30, 2021. However, it’s adjusted EBIT grew 22.3% year-over-year to $346 million, while its net loss came in at $187 million representing a 24% year-over-year increase. Also, its non-GAAP EPS came in at $0.90, up 40.6% year-over-year.

Past and Expected Financial Performance

ACN’s revenue grew at a CAGR of 9% over the past five years. Analysts expect ACN’s revenue to increase 16.2% in fiscal 2022 and 8.7% in fiscal 2023. The company’s EPS is expected to grow 16.9% in fiscal 2022 and 11.4% in fiscal 2023. Moreover, its EPS is expected to grow at 10.1% per annum over the next five years.

On the other hand, DXC’s revenue grew at a CAGR of 18% over the past five years. The company’s revenue is expected to decrease 7% in fiscal 2022 but increase 0.5% in fiscal 2023. Its EPS is expected to grow 51% in fiscal 2022 and 17.2% in fiscal 2023. Also, DXC’s EPS is expected to grow at 28.4% per annum over the next five years.

Profitability

ACN’s trailing-12-month revenue is three times what DXC generates. ACN is also more profitable with a gross profit margin and net income margin of 32.38% and 11.69% compared to DXC’s 22.54% and 2.32%, respectively

Furthermore, ACN’s ROE, ROA, and ROTC of 31.87%, 11.87%, and 21.37% are higher than DXC’s 8.01%, 0.78%, and 1.29%, respectively.

Valuation

In terms of forward non-GAAP P/E, ACN is currently trading at 38.01x, 344% higher than DXC’s 8.56x. Moreover, ACN’s forward EV/EBITDA ratio of 21.56x is 392.2% higher than DXC’s 4.38x.

So, DXC is relatively affordable here.

POWR Ratings

ACN has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. On the other hand, DXC has an overall rating of C, which translates to Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

ACN has a B grade for Sentiment, consistent with analysts’ expectations that its revenue will increase in the upcoming months. On the other hand, DXC has a D grade for Sentiment, in sync with analysts’ expectations that its revenue will decline in the near term.

Moreover, ACN has a grade of B for Quality. This is justified given ACN's 27.95% trailing-12-month EBITDA margin, 107.3% higher than the industry average of 13.49%. On the other hand, DXC has a Quality grade of C, in sync with its 9.47% trailing-12-month EBITDA margin, 29.8% lower than the industry average of 13.49%.

Of the 11 stocks in the A-rated Outsourcing - Tech Services industry, ACN is ranked #4. However, DXC is ranked #39 of 76 stocks in the D-rated Technology - Services industry.

Beyond what I’ve stated above, we have also rated the stocks for Momentum, Value, Stability, and Growth. Click here to view all the ACN ratings. Also, get all the DXC ratings here.

The Winner

Rapid digital transformation is expected to drive the information technology services market’s growth significantly in the foreseeable future. While both ACN and DXC are expected to benefit, it is better to bet on can now because of its higher profitability.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Outsourcing - Tech Services industry here. Also, click here to access all the top-rated stocks in the Technology - Services industry.

ACN shares were trading at $397.80 per share on Friday afternoon, down $2.80 (-0.70%). Year-to-date, ACN has gained 54.17%, versus a 24.81% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

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