Accenture PLC (ACN) is one of the world's largest publicly owned management consulting, technology and outsourcing services firms, with approximately 275,000 employees and with offices and operations in more than 200 cities in 56 countries. It provides a diverse portfolio of small- and large-scale consultancy services through 5 major operating segments:
- Communications, Media and Technology (accounting for 20% of revenues in 2013), where it serves most of the world’s leading wireline, wireless, cable and satellite communications and service providers with services designed to address major business and operational issues related to sales and service channels, billing and revenue management, new product innovation, network services, corporate and enterprise functions and information technology.
- Financial Services (accounting for 21% of revenues in 2013) helps clients in the banking, capital markets and insurance industries increase cost efficiencies, grow their customer bases and manage risks.
- Health and Public Services (accounting for 17% of revenues in 2013) provides research-based insights to help healthcare payers and providers as well as government departments and agencies, public service organizations, educational institutions and non-profit organizations around the world to deliver better social, economic and health outcomes.
- Products (accounting for 24% of revenues in 2013) provides business and IT solutions to customers in the: air, freight and travel services; automotive; consumer goods and services; industrial equipment; infrastructure; life sciences and retail industries.
- Resources (accounting for 18% of revenues) helps companies in the chemicals, energy, forest products, metals and mining, utilities and related industries seek new ways of creating value for shareholders and address regulations and climate change requirements.
For investors willing to accept some cyclical pricing risk, ACN's shares represent a strong play that stands to benefit from the U.S. and global economic recovery as well as businesses' needs to replace older capital, IT and operating systems. General, large-scale consultancy contracts should experience continued health across all operating lines as the business cycle becomes more favourable. In our opinion, the company has two major growth drivers that should not be overlooked. One is their strong presence and international reputation providing consultancy services to the energy sector. The second is their substantial presence in the U.S. financial services sector. Both are seeing a massive inflow of new investment as energy prices recover from recessionary lows and the fallout of the financial crisis subsides. In addition, there are all sorts of new technologies and social media platforms that have been introduced and embraced over the last 5 years that will require assistance for integration. These megatrends will support ACN's business for at least the medium-term.
A point of caution is that ACN is a cyclical company and is more sensitive to government spending patterns than most other companies, as is evident by the company's volatile consultancy bookings and backlog patterns. There is also a lot of competition in this industry – from both smaller and larger players – and the slightest misprice or criteria gap in a contract bid could drive down revenues and profits pretty quickly. Also, due to large budget deficits and government cutbacks all around the world, sales to these customers will soften.
About $30,394M in revenues moved through ACN's door in 2013. ACN’s revenues for the August 2004 to August 2013 period clocked in at an average annual rate of growth of 8%. ACN's sales are directly tied to business sector GDP and investment, so as the economy continues to strengthen, ACN's sales continue to grow. Revenues grew at an annual rate of 4% over the last 5 years, but by 10% over the last 3 years. Year-over-year ACN continues to make substantial sums of money off revenues after subtracting costs of goods sold, with gross profits reaching $9,384M in 2013. Gross profits have grown by 8% per year over the last 10 years and 9% per year over the last 3 years.
ACN's production costs appear well under control, with COGS rising by 10% per year over the last 3 years against revenue growth of 10%. ACN appears to have an easy time passing on the cost of inflation to consumers. Gross margins have remained strong and steady at around 31% since 2004. ACN spends between 55% and 60% of gross profits on hard costs associated with selling expenses, advertising, management salaries, payrolls, advertising and legal fees. Costs of SG&A have also been increasing at a stable rate, rising by 7% per year over the last 10-year and 3-year periods. We consider this a positive sign when viewed against annual revenue growth of 8% and 10% over the same periods respectively. Overall we think that management is doing a good job at offsetting higher salary costs with other cost reductions on the operating line. .
ACN has shown substantial strength and stability in its operating earnings picture, rising by 11% per year over the last 10 years and by 14% per year over the last 3 years. The long-term trend in operating income has been upward, rising from $1,759M in 2004 to $4,339 in 2013. ACN has earned on average about 12% in operating earnings on total revenues over the last 10 years – a reasonable finding. ACN carries a small amount of debt on its books and, consequently, pays out less than 0.5% of operating income on interest payments annually. This is a very acceptable result and lower than much of the competition.
Bottom line results show a strong upward long-term trend in earnings, with minimal volatility, growing at an average annual rate of 19% over the last 10 years. Earnings are expected to tick upwards in 2014 as investment and business spending continues to improve with the economy. ACN’s fairly strong competitive position has allowed it to maintain net margins of on average 7% over the last 10 years – this is an acceptable result but nothing spectacular. Net margins have expanded to stronger levels over the last 3 years averaging 9%. We hope margins will continue to expand and stabilize above the 10% mark, which will likely call for further cost reductions on the operating line. We consider 10% a minimum threshold for competitively superior firms in the sector. Diluted EPS grew from $1.22 per share in 2004 to $4.93 in 2013. We like seeing that, since 2004, earnings growth has significantly outpaced revenue growth by 11% per year. To us this is a sign of earnings quality strength. We also like that the firm's share-base continues to fall, with diluted shares falling by almost 300M since 2004.
ACN's ROE and ROA performance has been exceptional, averaging 58% and 13% respectively over the last 10 years.
Market-based price multiple valuation
As an initial step towards evaluating ACN, we have assembled the 13-year historical record of the company’s Price/Sales, Price/Earnings, Price/Free Cash-Flow and Price/Book Value ratios as shown below.
|Mean Abs. Dev.||0.152766||3.44816||2.905865||5.646337|
|Forward per Share Estimates (2014-2023)|
After reviewing the distributional properties of the multipliers around their respective means, we are confident about using multiplier values of 1.45, 17.0, 14.0 and 12.0, respectively. Based on our experiences with the industry, we believe that earnings are particularly important predictors of company value. Consequently, instead of finding an equally weighted price average, we decided to apply the weights shown below for calculating a weighted average estimated price.
To do this, each expected multiplier was multiplied by the corresponding variable for the company’s expected average 10-year forward sales, earnings, free cash flows and book value per share. We then decided to overweight earnings per share and derived a fair value estimate for ACN of $92.12. At its current market price of $80.32, this implies a margin of safety of 15% The question that remains for investors is: is there sufficient safety in the position to qualify for investment given the business’ inherent operating and price risk?