Management consulting and professional services company Accenture PLC (ACN, Financial) has a strategy that could lead to improving stock performance.
The company is heavily investing in a number of key areas, such as in its interactive and applied intelligence segments. This is helping to improve its competitive position at a time of strong demand across a number of industries.
It is also positioning itself for growth in the cloud-based applications arena, where partnerships with major operators are set to be delivered.
Although the stock has a relatively high rating, its growth strategy could lead to further outperformance of the S&P 500. The stock climbed 18% over the last year versus a gain of 8% for the index.
Investing for growth
The company’s interactive division could catalyze its growth rate through disrupting the marketplace. Accenture is seeking to leverage its position as the world’s largest provider of digital marketing through the addition of new features that could enhance its competitive position. In addition, it has announced six acquisitions in the interactive space while increasing its overall investment. By doing so, it is set to further differentiate its offering from those of industry rivals.
Investments are also being made in the applied intelligence division, helping it to more effectively combine advanced analytics and artificial intelligence with its understanding of a wide range of markets. In order to differentiate itself from peers, the company has developed more than 250 proprietary, industry-specific assets. It is also making progress in Industry X.0, expanding its capabilities in a wide range of innovation centers within an increasingly large global network. To complement this, the company is ramping up investments in its cybersecurity business, increasing its exposure to a market that is growing at double-digit rates.
Evolving business
Accenture’s operations segment is set to benefit from continued innovation. It recently introduced SynOps, which is a unique approach to organizing data, applied intelligence and digital technologies with human expertise. This is expected to drive top-line growth for a wide range of customers. The company has also hired over 400 new managing directors in its strategy and consulting division, which is expected to further differentiate its offering in this area.
The company is positioning itself for growing demand for cloud-based applications. It is leveraging the capabilities of over 30,000 engineering professionals, with its infrastructure services set to remain a leading integrator for cloud partners such as Amazon (AMZN, Financial) Web Services and Microsoft (MSFT, Financial) Azure. Accenture is also seeking to partner with an increasing number of global leaders in its intelligent platform services segment, where it already has deals with SAP (SAP, Financial) and Oracle (ORCL, Financial).
Risks
Accenture is currently in the process of searching for a new CEO after the passing of its previous CEO, Pierre Nanterme, in January. This may cause a degree of short-term uncertainty among investors as interim CEO David P. Rowland is currently in charge. Although the company's strategy appears to be sound, a new CEO may make changes that disrupt operations. Investors may, therefore, demand a wider margin of safety to reflect this possible risk.
Even if the new CEO makes changes, Accenture will be able to combine its capabilities across a number of strategic areas. So far this year, it has generated $22 billion in new bookings and its unique position provides it with a strong platform for long-term growth. It is currently growing twice as fast as the wider market across its various divisions. Therefore, its progress under an interim CEO, and eventually under a permanent CEO, is likely to remain robust.
Outlook
Accenture’s earnings per share are forecasted to grow 9% over the next fiscal year. Although its pric-earnings ratio of 24.5 is relatively high, its growth strategy and dominant position in a number of markets could help justify its current valuation.
The company's investments in areas such as applied intelligence and its interactive segment could lead to increased differentiation versus sector peers. Its continued move into the technology arena through intelligent software engineering services may help to strengthen its competitive position in a fast-growing market.
Although the loss of its CEO could cause sentiment to weaken in the short run, its strong position in a number of key markets suggests it is well placed to generate further profit growth.
Having outperformed the S&P 500 in the last year, Accenture could continue to beat the index over the long run as the areas in which it is focused continue to offer high growth rates.
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