The last time I looked at Accenture PLC (ACN, Financial), I felt that the stock was overvalued, but that the company would continue to see accelerated growth. It turns out that assumption was correct as the stock has fallen significantly since the beginning of the year while the business has continued to produce stunning results.
The stock is down 34% year-to-date, which is considerably worse than the S&P 500 index. However, I think this decline could be overdone as Accenture’s business is performing quite well. The company reported earnings results last month that were mixed, but the numbers were up compared to the prior year. The forecast for the remainder of the year was solid as well.
Aside from good business results, Accenture is trading at a discount to its GF Value and has an extremely high GF Score, which means the stock could potentially be trading with a margin of safety.
Earnings highlights
Accenture reported earnings results for its third quarter of fiscal 2022 on June 23. Revenue grew nearly 22% to $16.2 billion, which came in $111 million ahead of what Wall Street analysts had anticipated. Currency exchange was a 5% headwind to results. Earnings per share of $2.79 was 4 cents below estimates, but was a 16% increase from the prior-year quarter.
Every geographic market the company breaks out grew by double-digits. North America was up 23% to $7.6 billion, Europe improved 30% to $5.4 billion and Growth Markets increased 30% to $3.2 billion.
Growth was also seen throughout Accenture’s industry groups. Communications, Media and Technology and Products both grew 31% to $3.4 billion and $4.6 billion, respectively. Financial Services was up 24% to $3.1 billion, Health and Public Service grew 19% to $2.9 billion and Resources increased 26% to $2.1 billion.
Accenture’s new bookings totaled $17 billion, a 10% increase from the prior year. Bookings are now up almost 50% over the last two years. New bookings for the quarter broke down fairly evenly between consulting and outsourcing, with the former contributing 54% and the latter accounting for 46% of the total.
Following third-quarter results, Accenture provided revised full year guidance. The company expects fiscal year revenue to grow 25.5% to 26.5% year-over-year, up from prior guidance of 24% to 26%. Earnings per share is projected to fall in a range of $10.61 to $10.70, which is down from prior guidance of $10.61 to $10.81, but would be up 16.2% from fiscal year 2021 if achieved.
Takeaways
Accenture has now produced five consecutive quarters of at least 20% revenue growth. The first four of these quarters came against weak or fairly normal comparable periods. Earnings per share was a similar story as well. However, the most recent quarter follows last fiscal year’s third quarter, where Accenture had 21% revenue growth and 26% earnings growth.
One major reason that results have been so positive recently is that growth has been broad based, with every geographic market and every industry group posting very high growth rates.
The third quarter was no different. North America gains were driven by growth in nearly all industry groups, while Europe was led by gains in France, Germany, Italy and the U.K. Growth markets were powered by double-digit increases in Australia and Japan.
Bookings growth remains robust, up double-digits from the prior year. Last fiscal year’s bookings grew 39% from the prior year, so demand continues to be very high for Accenture. Year-to-date bookings of $53.3 billion is 20% higher from the prior year. Bookings being nearly even among consulting and outsourcing speaks to the balance of demand that Accenture’s business is experiencing.
Leadership upwardly revising revenue guidance for fiscal 2022 is a positive, showing that the company’s recent strong results are expected to continue. That this comes on top of last year’s double-digit improvement provides further evidence of business strength. Accenture could potentially see a two-year stacked revenue growth rate of almost 40% this fiscal year.
The lowering of earnings per share guidance is mostly due to a higher drag from currency exchange, which is now projected to be a 4.5% headwind to results. Leadership had previously anticipated a 3% drag on results. Currency exchange is something that isn’t in the control of the company, so the slight decline in expected earnings per share for the year doesn’t appear to be a glaring issue.
Valuation analysis
Accenture closed Thursday’s trading session at $268.67. Using the midpoint of company guidance, the stock has a forward price-earnings ratio of 25.2. According to Value Line, the stock has a 10-year average price-earnings ratio of 21, so Accenture can be considered overvalued on a historical basis. For context, the multiple was close to 40 in early January.
Looking at the GF Value chart, Accenture looks much more attractively valued today than it did at any point over the last two years.
Accenture has a GF Value of $325.87, implying a price-to-GF-Value ratio of 0.82. The stock could return 21.3% if it were to reach its GF Value. Shares are rated as modestly undervalued by GuruFocus.
The company receives a stellar GF Score of 98 out of 100. GuruFocus uses a variety of factors to determine its GF Score ranking system. Stocks with higher scores typically outperform those with lower scores, according to a historical study by GuruFocus.
Final thoughts
Accenture’s third quarter was overall pretty solid. Earnings per share came up a bit short of market expectations, but was still considerably higher than the prior-year period. Revenue growth once again came in above 20% and followed a comparable period that was quite good. The company continues to see robust demand, with new bookings surging over the last two years.
Leadership raised its revenue forecast as Accenture appears likely to continue its trend of 20%+ top-line growth. Earnings per share is projected to be a nickel less at the midpoint than prior guidance, but this was largely due to the negative impact of currency exchange and not overall weakness in Accenture’s business.
Shares of Accenture are trading at a premium to their historical multiples, but look undervalued relative to the GF Value. Accenture also has a very high GF Score. Accenture’s stock performance so far this year is underwhelming, to say the least, but the company is executing at a high level and is displaying growth to counter the price decline.
