In this article, let's take a look at Accenture plc (ANC), a $52.36 billion market cap company, which is a global management consulting, technology services and outsourcing company.
A well-positioned company
Ireland-based Accenture has 275,000 employees, with operations in more than 120 countries and a deep specialization in approximately 40 vertical industries.
It focuses on three key growth areas: management consulting; technology and business process outsourcing. This way it collaborates with its clients in order to improve their value added in terms of efficiency and growth prospects.
The industry is characterized for being highly competitive, but we believe the firm can outperform its peers in the long run, differentiating by offering solutions with real business benefits. Further, the switching costs allow the company to gain valuable insight into emerging trends and technology.
Growth drivers
Accenture plans to continue developing mobile, social, cloud and analytics, as key growth drivers for the upcoming future.
We believe another long-term growth strategies should be acquisitions, because they could constitute another key aspect for the firm.
In the last three years, it has spent about $1.3 billion in order to improve its service offerings and become more relevant in faster growing markets.
Attractive dividend policy
The firm has an attractive dividend policy showing its commitment to return cash to investors in the form of dividends as it generates healthy cash flow on a regular basis. The current dividend yield is 2.3%, which is quite good to protect the purchasing power, especially considering the consistency of track-record dividends payments. Dividends have been paid since 2005.
Estimated one-year price
According to Yahoo! Finance, the estimated one-year target share price is $ 87.09, so if you buy shares at current market price ($79.72), your return from price appreciation would be 9.2%. In addition, you have to consider any cash flow received by the asset. So for holding the stock one year, you'll be paid a dividend of $4.08 at the end of the year. If we divide this number by current price per share, we obtain the dividend yield, which is the other component of the return on an investment for a stock, and in this case is 2.3%. So the total expected return for investing in Accenture is 11.5%, which we believe is an attractive stock return.
Revenues, margins and profitability
Looking at profitability, revenues increased by 9.86% and led earnings per share increased in the most recent quarter compared to the same quarter a year ago ($1.08 vs $1.01). During the past fiscal year, the company reported lower earnings of $4.52 versus $4.93 in the prior year. This year, Wall Street expects an improvement in earnings ($4.85 versus $4.52).
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| ACN | Accenture | 55.71 |
| GIB | CGI Group Inc | 18.07 |
| DOX | Amdocs Ltd | 12.30 |
| IT | Gartner Inc | 65.84 |
| TDC | Teradata Corp | 19.67 |
| INFY | Infosys Ltd | 24.79 |
| Ă‚ | Industry Median | 6.78 |
The company has a current ROE of 55.71% which is higher than the industry median and the ones exhibit by CGI (GIB, Financial), Amdocs (DOX, Financial), Teradata (TDC, Financial) and Infosys (INFY, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Gartner (IT, Financial) could be the option. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 18.1x, trading at a discount compared to an average of 47.2x for the industry. To use another metric, its price-to-book ratio of 9.4x indicates a premium versus the industry average of 2.84x while the price-to-sales ratio of 1.8x is above the industry average of 2.33x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $25,011, which represents a 20.2% compound annual growth rate (CAGR).
Final comment
The company makes business with the largest multinational corporations, helping it to keep a market-leading position. Further, as we have seen, it generates free cash flow that will shareholder´s value. Finally, we think that cloud, mobility, and analytics are going to be the key growth drivers in the short to mid-term; with the development of intellectual property and specialized teams.
Moreover, the PE relative valuation and the return on capital that significantly exceeds the industry average and make me feel bullish on this stock.
Hedge fund gurus like John Rogers (Trades, Portfolio), Francisco Garcia Parames (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Tom Gayner (Trades, Portfolio) and Jeremy Grantham (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014, as well as First Pacific Advisors (Trades, Portfolio) and Manning & Napier Advisors, Inc.
Disclosure: Omar Venerio holds no position in any stocks mentioned
