Accenture’s (ACN, Financial) shares have corrected from $105 in mid-August to $95. Analysts at Argus recently upgraded the stock citing compelling valuations and good earnings growth prospects. According to the Argus research team,
“Accenture appears to be delivering on its three goals of durable revenue growth, operating margin expansion, and strong free cash flow generation. Local currency revenue growth of 10% in the third quarter (of 2015) marked the third consecutive quarter of double-digit local-currency growth and suggests that Accenture is gaining share from rivals. … Accenture in the third quarter of 2015 generated $1.3 billion in free cash flow and remains on track for free cash flow in the $3.4 billion to $3.7 billion range for all of fiscal 2015. During its third quarter, Accenture had 12 clients with bookings in excess of $100 million, bringing the year-to-date total for such clients to 35. Accenture’s breadth of services, its unmatched number of verticals served and the reach of its global delivery network have enabled the company to establish 'unique relationships' with top-tier companies among its global 2,000 customer base.”
Argus analysts believe that Accenture warrants a premium valuation, given solid growth in revenue in local currency and in new orders, strong cash trends and increasing profitability. They set a target price of $110 for the stock.
Accenture is one of the world’s leading professional services companies, providing management consulting, technology and outsourcing services to clients across a broad range of industries. The company employs more than 305,000 people and has offices and operations in more than 200 cities in 56 countries. Its revenues before reimbursements (“net revenues”) were $30.0 billion for fiscal 2014.
Last quarter Accenture reported strong FQ3 results with its EPS beating estimates by 7 cents and revenues beating estimates by $220 million. The company also raised its adjusted EPS guidance to $4.73-$4.78 (from a prior $4.66-$4.76 ) and constant currency revenue guidance to 9%-10% (from 8%-10%). The company spent $518M on buybacks last quarter. With $4B of net cash position, these buybacks should continue going forward.
The company is benefiting from strong growth in digital work. Moshe Katri, an analyst at Cowen and Company, also recently upgraded Accenture from Market Perform to Outperform. In his research report he wrote:
"We believe recent growth acceleration in consulting revenues and consulting bookings are sustainable given the company’s exposure to digital work (roughly 20% of FY15’s revenues, posting 20%+ growth), while the rest of Accenture’s revenue base is posting mid-single digit growth. Our sensitivity analysis suggests that digital could account close to 30% of revenues (on an organic basis) by FY17. Our survey suggests that digital will likely be additive to Accenture's revenue growth rather than being dilutive.”
Another analyst, Bryan Keane of Deutsche Bank, believes Accenture is set to take considerable market share in IT Services. According to him:
"After multiple years of sub-ACN standards for top-line growth (consulting grew flat Y/Y for several qtrs), ACN is back to taking considerable market share in IT Services. Over the last three years leading up to the recent outperformance, ACN has invested heavily in developing the right services and solutions investing $800m annual in-organic and $2bn in annual R&D in the Digital and Operations businesses, promoted new leadership and hired people with the right skills (1,000 Ph.D.s moved into data analytics). Approximately 60% of ACN’s deals are sole sourced (very high compared to industry average which reflects on the deep client relationships and quality of service) and the increased win rates and higher bookings conversion is driving accelerated growth. For the next several quarters, we believe ACN could achieve low double digit to high single digit constant currency rev growth rates (comps will get even tougher in FY16)."
Sell side analysts are not alone in terms of their bullish view on the company. Last year, Bill Nygren (Trades, Portfolio) of Oakmark Fund made similar positive comments on the company's performance. Here is the excerpt from his investor letter:
"Accenture is one of the largest consulting and outsourcing companies in the world with over $30 billion of net revenues. Accenture is one of very few companies that can serve customers in both capacities globally, with scale, and across most industry verticals. As a result, roughly 60% of revenue is from projects where Accenture is the sole service provider from conception through completion, and more than 90 of Accenture’s top 100 customers have been clients for more than 10 years. Management has a long track record of disciplined capital allocation, having reduced the share count by nearly one-third over the past decade, and it recently initiated a fairly generous dividend. Accenture sells for less than 15x EPS, net of more than $7 per share of cash on the balance sheet. We believe this is an attractive price for such a high-quality and well-managed franchise."
Accenture's share price appears significantly undervalued, according to Gurufocus' DCF calculator. The company has a business predictability rating of 4.5 stars and its current share price offers a margin of safety of 24%.
Accenture is trading at 18.30 times its forward earnings. The company has a dividend yield of 2.20% and its EPS is expected to grow 9.20% next year. I rate the stock a buy at current levels given its good growth prospects and reasonable valuations.
