Is Accenture Stock A Buy?

The IT giant, despite the Covid crisis, has been faring better than its peers. Inspite of the high valuation, the company’s stock looks a safe bet as Accenture benefits from focusing on ’New’ high-growth markets.

Accenture is a global professional services company, providing services and solutions in strategy, management consulting, digital, technology, operations and outsourcing to businesses and government agencies across the globe.

It came into existence in the 1950s as a business and technology consulting division of the now-defunct accounting firm, Arthur Andersen LLP, one of the Big Five accounting firms at that time. 

Accenture’s break from the parent company was finalized at the start of 2001 when it was required to change its name and was renamed Accenture. Arthur Andersen LLP crashed in the Enron scandal the following year.

The company, incorporated in Dublin, Ireland, is a Fortune Global 500 information technology services company with revenues of more than $43 billion in 2020.

With more than 500,000 employees worldwide in more than 120 countries, the company possesses leading capabilities in digital, cloud, and security. Its business is structured around six segments:  Communications, Media & Technology; Financial Services; Health & Public Service; Products, and Resources.

Is Accenture Stock A Buy?

Accenture, a global management consulting and professional services company, has performed better than many of its peers over the past five years. 

A slew of measures, ranging from acquiring small companies to moving into high-growth areas such as digital, cloud and cybersecurity products, has caused its stock to jump more than 150% during the same period.

However, Accenture’s stock took a hit after its fourth-quarter numbers came below analysts’ expectations. The management and technology consulting company’s revenue fell 2% to $10.8 billion, missing estimates by nearly $97 million. Its adjusted earnings slipped 2% to $1.70 per share, missing expectations by two cents.

During the same quarter in the previous year, the global tech consulting and services provider posted $1.74 earnings per share on sales of $11.06 billion.

Below expectation fiscal 2021 guidance also weighed down on the shares. The company forecast fiscal 2021 earnings in a range of $7.80-$8.10 a share, whereas analysts were expecting EPS of $8.13 a share.

The IT services provider stated it expects revenue to grow 3.5% at its mid-point of guidance. Analysts had estimated the revenue to grow 5.2% to $46.69 billion.

The fourth-quarter revenue, earnings and forward guidance may seem a bit disheartening to investors, but it is important to remember that most of it are temporary headwinds and the company possesses the wherewithal to easily weather the storm. 

The post-earnings fall in the stock price could, in fact, present a lucrative opportunity for investors to buy stocks of the company. A few important reasons why analysts are bullish on the stock are enumerated below:

ACN Healthcare Unit A Standout Performer

Accenture’s stock slipped in March as the IT company’s revenue suffered when the pandemic was at its peak. However, its health and public services segment continued to be the silver lining for the company, generating double-digit revenue growth.

The management attributed the high revenue growth generated by this segment to the Covid-19 crisis, which bolstered demand for more advanced contact tracing tools, additional security features, cloud-based and remote collaboration services, and better supply chain management.

And the good news is that the global tech consulting and services company remains optimistic about the healthcare market’s shining performance given that other industries will gradually recover from the chaos they currently find themselves in because of the contagion. 

“New” Businesses Growing Strongly

The top management is heavily concentrating on expanding the company’s “new” businesses, which include its digital, cloud and cybersecurity products along with artificial intelligence and blockchain technology, to compensate for the slower pace of growth of its older businesses.

Accenture’s “new” business revenue came up to $30 billion in fiscal 2020, an upswing of 10%. It accounted for 70% of its top line against 65% in 2019 and about 40% back in 2016.

The fast pace of expansion puts Accenture well ahead of its peers in the IT services space like IBM, which suffered a 6% decline in its global technologies services’ revenue last year.

However, IBM is now currently undergoing a long and massive restructuring process, having decided to split into two companies by spinning off its slower-growth IT services business. 

Deep Blue is trying to concentrate more on newer businesses such as cloud computing and artificial intelligence to offset the declines of its legacy businesses, but it seems that Accenture has been doing a better job of it.

Its bookings are shattering records

Accenture’s bookings climbed 9% year-over-year to $14 billion in the fourth quarter, riding on rising demand for its cloud, digital, and security services.

It was the second-highest quarterly bookings in the company’s history. For the full year, Accenture’s bookings grew 10% to $49.6 billion.

The Company’s Coffers Are Overflowing

Accenture’s free cash flow (FCF) stood at a record high of $3 billion in the fourth quarter. Free cash flow measures how much cash is generated by a business after accounting for operating expenses and capital expenditures.

The company made good use of its FCF in its latest quarter, spending $590 million in shares repurchase and giving out $509 million in dividends.

Free cash flow can be used for share repurchases, business expansion, debt repayment, or for additional dividends to investors. And Accenture has been doing exactly that.

Buoyed by the record figures, the company raised its quarterly dividend by 10% to $0.88 per share and gave the nod to a fresh $5 billion buyback.

The company’s commitment to boosting shareholder value by share repurchases and increasing dividends should endear it to investors, more so when other companies have been doing just the opposite during the pandemic.

Expanding Operating Margin & Fari Valuation

Accenture’s operating margin rose ten basis points year-over-year to 14.3% in the fourth quarter. The company attributed this to efficient cost controls, including layoffs and cutting down on travels and events.

Operating margin is the profit a company makes on a dollar of sales after paying for variable costs and operating expenses but before paying any interest or taxes.

With respect to valuation, the stock does not come cheap owing to five stellar years of growth. However, it has somewhat climbed down in price after a disappointing fourth-quarter report. This should represent a good starting point for new investors.

Risks Of Investing In Accenture

Accenture’s fiscal fourth-quarter 2020 earnings report was uninspiring as both, revenue and earnings, fell short of expectations. More significantly, the company offered a rather tepid guidance for the next quarter. 

Revenue declined in all its geographical markets. North America is Accenture’s biggest market, and revenue here slipped lower 1% to $5.2 billion.

Revenue in growth markets also dipped 1% to $2.2 billion, while the European division saw its performance waver by 5% to $3.4 billion.

However, the company’s six business segments are a clearer indicator of Accenture’s current performance and the challenges faced by the company.

The Health and Public Service segment was the star performer, thanks to the pandemic. Revenue in this segment jumped 11%, to $2.1 billion.

The remaining segments proved to be a laggard, as each saw revenue recede in comparison to the same quarter last year.

Going forward, Accenture did not display too much optimism about its top-line growth, expecting it to remain in a range of negative 3% to flat in fiscal first quarter of 2021 in comparison to the first quarter of 2020.

The disruption caused by Covid-19, no doubt, impeded Accenture’s ability to stimulate its top line, as the company’s revenue from its outsourcing and consulting business suffered owing to the chaos unleashed the world over by the pandemic.

The company’s CFO, K.C. McClure, accepted this fact, stating “…as we expected, we saw continued pressure from clients in the highly impacted industries, which include travel, retail, energy, high tech, including aerospace and defense and industrial.”

Despite a downbeat quarter, Accenture still has a lot of things working in its favor. The company continues to print cash at a highly impressive rate – Accenture generated a remarkable $3 billion of free cash flow in the last three months. 

Lending more strength to the company is its imposing balance sheet. In the latest quarter, the IT services company reported $5.1 billion of working capital, whereas it had just a measly $54 million in long-term debt.

And the huge cash-flow generation provides the company the leeway to continue with its investor-friendly policies.

Last year, the company distributed $5 billion to shareholders, $2 billion in the form of dividends, while it repurchased shares worth $3 billion.

The company also hiked quarterly dividend by 10%, to $0.88 per share. The management expects free cash flow to be in the range of $5.7 billion to $6.2 billion in the coming year, enough for the company to be liberal once again with its dividends and share repurchases.

The management also expects the global tech consulting firm to return to normal growth rates sometime in mid-2021, provided everything goes well and the global economy is spared “another macroeconomic shock.”

And with the Covid-19 vaccine just around the corner, the IT solutions provider giant believes it can expect year-over-year top line to grow from the high single digits to low double digits.

Are Accenture Competitors A Threat?

The company has many competitors in the industry. In IT Consulting, Accenture’s top competitors include Deloitte Consulting, Cognizant, IBM Global Services and Capgemini, to name a few.

In IT Application Management Services, Accenture faces competition from IBM Global Services, Cognizant Technology Solutions, Tata Consultancy Services, Infosys and Wipro, among others.

In Strategy Consulting, Accenture’s top competitors, among others, are the so-called ‘Big Three’: McKinsey & Co., Boston Consulting Group, Inc., and Bain & Co. Amongst these three, only Boston Consulting Group (BCG) is a publicly-traded company.

Accenture’s performance has been better than that of its closest competitor, IBM, in IT consulting services.

IBM’s revenue from Global Business Services totaled $3.97 billion, while Systems revenue fell 15% to $1.26 billion. The company blamed the coronavirus pandemic for its lackluster performance, in part, because of exposure to industries such as retail and transportation that suffered because of the contagion.

IBM also pulled its forward guidance. IBM is a company in transition, with the tech giant embarking on a path of transforming itself from a legacy IT provider to a cloud computing giant. Investors, as such, will be concerned about how things shape up a few years down the line.

Analysts expect the revenue to decline 4% this year before it modestly rebounds by 1.6% next year. Earnings are expected to fall 13% this year and rebound just 10% next year.

On the other hand, Accenture is poised to immensely profit from the modernization and digitization of enterprises in many industries, thanks to its shifting focus on growth technologies. The company has enough cash on its hands, and with a fortified balance sheet, it is unlikely to find itself in a dire situation even if the pandemic drags on.

Also, the coronavirus compelled many organizations to rethink their ways of doing business which bodes well for Accenture’s consultancy business.

With a lot of successful acquisitions, smart focus on growth technologies, strong free cash flow and large cash balance, Accenture remains a solid tech stock.

Is Accenture Stock A Buy: The Bottom Line

Accenture has been performing exceptionally well in the past years, a fact acknowledged and cheered by the market, with its stock advancing over 150%.

The company’s strategy for growth has paid off well as it acquired dozens of smaller companies during this period, and successfully shifted its focus away from slower-growth markets to “new” higher-growth digital, cloud, and security markets.

Additionally, the company’s cost-cutting measures were also successful, which enabled the information technology (IT) and consulting services provider to register stellar revenue and earnings growth over the past five years.

The Covid-19 crisis also did not seem to impact the company’s strong performance in a major way for two reasons.

First, a lot of organizations rushed to bolster their IT infrastructure and remote working capabilities throughout the pandemic.

More importantly, outstanding performance delivered by its health and public services segment easily made up for the softening demand from its other segments. Accenture generated 65% of its revenue from its “new” digital, cloud, and security markets last year, much higher than that of its IT rivals like IBM.

Accenture CEO Julie Sweet noted that the crisis “immediately widened the gap” between the technological leaders and laggards. She acknowledged that Accenture was seeing the “leaders doubling down on their investments, while the laggards recognize the speed to accelerate the pace of their transformation.” That transformation enabled it to generate much stronger revenue and earnings growth.

Good dividends payout

Accenture currently pays a forward dividend yield of 1.3%.  The company began by paying annual dividends in 2005, then took a decision in 2010 to pay dividends twice a year, and finally switched to paying quarterly dividends last year.

The IT services titan has been increasing its dividends every year since fiscal 2011. The company has spent just 23% of its free cash flow on its dividend over the past 12 months, and with plenty of cash it can easily afford to increase its dividends.

Conclusion

Accenture’s stock isn’t cheap at nearly 30 times forward earnings, but analysts believe the tech titan’s stock is likely to generate steady gains in the near future.

The company is well shielded from the macro headwinds and its focus on growth areas could help it amply leverage the growth potential of rapidly expanding cloud market.

All in all, despite its high valuation, Accenture remains a safe bet in an increasingly wobbly market.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.