Accenture (ACN, Financial), the $78.7 billion Ireland-based information technology services company, reported 5% year-over-year revenue growth to $27.12 billion and a contrasting 17.4% drop in profits to $2.51 billion in its third-quarter 2017 results in June.
The figures represent a margin of 9.3% compared to 11.8% in the same period last year.
Accenture recorded 7.1% higher operational expenses that included a $509.8 million increase in pension settlement charges leading to lower profits for the period.
For fiscal 2017, Accenture expects net revenue growth to be in the range of 6% to 7% in local currency compared with 6% to 8% previously. The company expects diluted GAAP earnings per share (EPS) to be in the range of $5.37 to $5.44, including the 47 cents impact of the pension settlement charge, and free cash flow to be in the range of $4.0 billion to $4.3 billion.
In midpoint comparison, Accenture will record higher revenue growth in fiscal 2017 than it had in the previous year, 1.74% higher free cash flow and 16.2% decline in EPS.
“We are pleased with our strong third-quarter financial results. We delivered 7% revenue growth in local currency and gained significant market share with broad-based growth across most dimensions of our business. I am particularly pleased with our new bookings of $9.8 billion, which demonstrate that our services and capabilities continue to be highly differentiated in the marketplace.
“We are clearly benefiting from the diversity of our business – from an industry, geographic and capability standpoint – which drives durability in our financial performance. At the same time, our focused investments in high-growth areas, such as digital, cloud and security services, are further differentiating Accenture and enabling us to grow ahead of the market. We remain very well positioned to continue driving profitable growth and delivering value for our clients and shareholders.” –Â Pierre Nanterme, Accenture chairman and CEO
Valuations
Accenture trades at some discount compared to its peers. According to GuruFocus data, the company had a trailing price-earnings (P/E) ratio of 21.76 times vs. the industry median of 27.1 times, a price-book (P/B) ratio of 9.6 times vs. the industry median of 3.1 times and a price-sales (P/S) ratio of 2.3 times vs. the industry median of 2.4 times.
The company also had a trailing dividend yield of 1.97% with a 43% payout ratio.
Analysts' average 2017 revenue and EPS expectations indicated forward multiples of 2.3 times and 20.9 times while company expectations (at midpoint) indicated multiples of 2.13 times and 20.9 times.
Total returns
Accenture has outperformed the broader Standard & Poor's 500 index in the past three years having generated 16.11% total returns vs. the index’s 9.8% (Morningstar). So far this year, the company provided 5.82% total returns vs. the index’s 9.98%.
Accenture
According to filings, Accenture is one of the world’s leading professional services companies with approximately 384,000 people serving clients in a broad range of industries and in three geographic regions: North America, Europe and Growth Markets (Asia Pacific, Latin America, Africa, the Middle East, Russia and Turkey).
Drawing on a combination of industry and functional expertise, technology capabilities and alliances and our global delivery resources, Accenture seeks to provide differentiated services that help its clients measurably improve their business performances and create sustainable value for its clients’ customers and stakeholders.
In fiscal 2016, 48% of Accenture’s revenue was in North America, 35% in Europe and the rest in other countries.
Accenture has five operating groups: Communications, Media &Technology, Financial Services, Health & Public Service, Products, Resources and Other.
Communications, Media & Technology
Accenture’s Communications, Media & Technology operating group serves the communications, electronics, high technology, media and entertainment industries.
In the recent nine months of operations, revenue in the segment grew 2.9% year over year to $5.06 billion or 20% of total unadjusted sales. The division also delivered an operating margin of 15% compared to 15.2% in the same period last year.
Financial Services
The Financial Services operating group serves the banking, capital markets and insurance industries.
In the recent three quarters, revenue in the division grew 4% year over year to $5.44 billion (21% of total unadjusted sales) and reported an operating margin of 16.7% vs. 16.2% year over year.
Health & Public Service
The Health & Public Service operating group serves health care payers and providers as well as government departments and agencies, public service organizations, educational institutions and nonprofit organizations around the world.
In the recent nine months, revenue grew 2.7% year over year to $4.57 billion (18% of total unadjusted sales) and reported a margin of 13% compared to 14.1% the same period last year.
Products
The Products operating group serves a set of increasingly interconnected consumer-relevant industries. Accenture’s offerings are designed to help clients transform their organizations and increase their relevance in the digital world.
In the recent three quarters, revenue climbed by 14.2% year over year (fastest among all segments) to $7 billion (27% of total unadjusted sales, largest revenue generator). The division also provided a margin of 16.8% (most profitable in all segments) vs. 15% in the same period last year.
Resources
The Resources operating group serves the chemicals, energy, forest products, metals and mining, utilities and related industries.
In the past three quarters, revenue in the segment fell by 1.5% to $3.6 billion (14% of total unadjusted sales) and had a margin of 11.4% compared to 12.9% in the first three quarters of last year.
Sales and profits
In the past three years, Accenture had average revenue growth of 4.6%, average profit growth of 7.81% and average profit margin of 10.11% (Morningstar).
Cash, debt and book value
As of March, Accenture had $3.38 billion in cash and cash equivalents and $27.7 million in debt with nearly negligible debt-equity ratio at 0.003 times compared to 0.004 times in the same period last year. Shareholder equity rose by $1.04 billion while debt declined by $1.2 million.
Of Accenture’s $21.14 billion assets 21.8%Â were identified as goodwill. The company also grew its book value by 15.2% year over year to $8.88 billion.
In addition, the company had $1.48 billion in retirement obligation compared to $1.14 billion in March of last year.
Cash flow
In the nine months, Accenture’s cash flow from operations rose by 16.5% year over year to $3.03 billion. Capital expenditures were $324.8 million leaving the company with $2.71 billion in free cash flow compared to $2.26 billion in the same period last year. The company allocated 131.5% of its free cash flow in dividends and share repurchases while having raised $600.9 million through share issuance.
Nonetheless, overall share count has dropped by 150.8 million year over year.
Conclusion
Accenture exhibited overall business growth so far this fiscal year as manifested in its recent report. Nonetheless, the company did incur more expenses year over year especially that of pension settlement charges, which helped sink the company’s profits for the time being.
Reviewing each of the company’s business operations indicated strong genuine growth particularly in its largest revenue and profit generator, Products, on a year-over-year basis. Overall business exhibited growth despite the company’s somewhat limited exposure, about 14% of sales, to the energy and mining industries.
Despite the presence (20%) of blue sky elements in its balance sheet, the company has minimal debt and growing book value and has been very generous to its shareholders over the years.
Twenty-six analysts have an average price target of $131.88 per share, indicating a 7.4% upside from the share price of $122.74 (at the time of writing). Using Accenture’s midpoint revenue growth expectations followed by a 5% margin because of its high-quality business indicated a value of $113.38 per share.
In summary, Accenture is a hold with $130 per share value.
Disclosure: I do not have shares in the company mentioned.
