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Robert Abbott
Robert Abbott
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A Close Look at Accenture as It Plans for Layoffs

Is this a blip or a big deal for the major technology consulting company?

August 28, 2020 | About:

According to Business Insider's India division, Accenture PLC (NYSE:ACN) plans to lay off 25,000 employees. That would affect about 5% of the Dublin-based multinational technology consulting company's 500,000 employees.

While there has been no mention of it on Accenture's website, CEO Julie Sweet was quoted by NDTV (New Delhi TV) as saying:

"In a normal year, we transition out about 5 per cent and we hire to replace them, because we are in a demand scenario. Right now, we're not in a demand scenario, so if we manage out the same percentage of people and don't replace them, it allows us to continue to invest and preserve some people who have lower chargeability for when the market comes back."

In discussing its third-quarter fiscal 2020 results, the company reported that outcomes for the quarter were in line with its expectations, with operating income up slightly and earnings per share down slightly. It also had a cash balance of $6.4 billion dollars as of May 31 (the end of its fiscal third quarter), up $1 billion from the end of the previous quarter.

GuruFocus financial data shows Accenture has long-term debt of $2.765 billion. The company also felt comfortable enough with its financial situation to continue paying its dividend and buying back shares. This table from the earnings release highlights this:

Accenture third-quarter dividend share buybacks

Thus, should investors consider Accenture as a long-term investment, despite the mix of short-term news? Let's take a look using my normal valuation strategy.

Financial strength

Accenture financial strength

Accenture has significantly reduced its debt in the past few years, and that helps explain why it receives an excellent GuruFocus score for financial strength. Underlining that strength is its interest coverage ratio of 246.87. That means it generates enough operating income to pay its interest expense almost 247 times over. The Piotroski F-Score, at 6 out of 9, means this is a financially stable company.

Most impressive on this table is the relationship between the return on invested capital (ROIC) of 24.66% to the weighted average cost of capital (WACC) of only 6.08%. The company earns just over $4 on average for every dollar in capital it receives from shareholders and lenders.

Profitability

ACN profitability

Accenture is one of the few companies that receives high marks both for its financial strength and profitability. Behind the profitability rating are strong and growing operating and net margins:

Accenture operating margin net margin

All three growth rates at the bottom of the table are over 4%, although they are not as high as they have been in the past. Further, Ebitda and earnings per share growth are not as strong as revenue growth.

Valuation

ACN valuation

One of the consequences of having excellent financial strength and profitability is that there is a lot of demand for shares, pushing up the price. As this chart shows, Accenture's share price has had a positive trend line over the past 10 years:

Accenture 10 year price chart

Investors who bought 10 years ago and continued to hold the stock since then would have enjoyed a capital gain of more than 6.25 times their original investment.

At 31.51, the price-earnings ratio is near a 10-year high and well above its median of 18.61. The PEG ratio is also high at 3.5.

The overvaluation scenario continues with the discounted cash flow (DCF) calculator, which shows the company trading at about double its fair or intrinsic value according to the below assumptions:

Accenture DCF

Dividends and buybacks

Accenture dividends share buybacks

The current dividend yield of 1.34% is low compared to the S&P 500's average of 1.88, but we need to factor in the share price. It reminds us of the importance of buying at a low price:

Accenture share price and dividend yield

The dividend payout ratio is on the low side at 31%; the company is keeping more than two-thirds of its free cash flow for growth.

At 9.9%, the dividend growth rate is healthy. However, it should be noted the growth is being applied to a low base. Hence, the five-year yield-on-cost is just over 2.1%.

The forward dividend yield is the same as the trailing twelve-month yield, indicating there has not been a dividend increase recently.

The three-year share buyback ratio is low at 0.3. Over the past decade, its median share repurchase ratio has been 1.7 and in its most aggressive year hit 7.2. Whatever the annual rate, the share count has come down over time:

Accenture shares outstanding

Gurus

Thirteen of the investing gurus followed by GuruFocus have stakes in Accenture.

Pioneer Investments (Trades, Portfolio) leads the pack at the end of the second quarter with 2,733,035 shares after a reduction of almost 7% during the quarter. The investment gives Pioneer a 0.43% stake in the company.

Jeremy Grantham (Trades, Portfolio) of GMO LLC had the second largest position with 1,674,041 shares after adding 0.41% in the quarter. MS Global Franchise Fund (Trades, Portfolio) was third in share volume with 537,022 shares, following an addition of nearly 11%.

Conclusion

According to the above factors, I think we need not be concerned about Accenture's reported plans to lay off 5% of its global workforce—from an economic perspective, at least. The company has impressive fundamental strengths all-around, which is rare.

That's made the company popular with investors and driven up the share price. The stock does go on sale from time to time, most dramatically with the big market drawdown this past March.

In my opinion, growth investors may consider taking the plunge now, despite the overvaluation. Value investors will likely wait for the price to reverse to the point where there is a positive margin of safety (debt is not too much of a concern with this stock). Income investors will likely look elsewhere; even when the price bottomed out in March, the yield was only in the mid single-digits.

Disclosure: I do not own shares in any companies named in this article.

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About the author:

Robert Abbott
Robert F. Abbott has been investing his family’s accounts since 1995 and in 2010 added options -- mainly covered calls and collars with long stocks.

He is a freelance writer, and his projects include a website that provides information for new and intermediate-level mutual fund investors (whatisamutualfund.com).

As a writer and publisher, Abbott also explores how the middle class has come to own big business through pension funds and mutual funds, what management guru Peter Drucker called the "unseen revolution."

Visit Robert Abbott's Website


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