This past weekend, I had the pleasure of staying with good friends, one of whom is employed with Accenture (ACN). I knew of the company and its prestigious reputation, but had not spent time delving into its financials. We had discussed her work in the past and it sounded interesting, so I decided to do a quick perusal of the company at large. I was impressed by what I found.
A Phenomenal Track Record
ACN is a management consulting, technological services and outsourcing company with 261,000 people serving clients in over 120 countries. In terms of its clients, they fall into five broad operating groups:
- Communications, Media & Technology
- Financial Services
- Health & Public Service
ACN's value proposition is to provide highly trained staff to large companies to take on special projects. Its product is human capital, and as you can see from the chart below, the human capital business is booming.
ACN's historical price action is solid. Since June 28, 2002, ACN has returned 320%, blowing away the S&P 500's 60% over the same period. This increase in stock price was closely matched by an increase in revenue per share, which grew 226%. Even during the 2008 recession, the price of ACN only fell 25%, from $40 per share to $30 per share, while the broader market sold off over 50%. Revenue was hurt by the recession, but it was still fairly resilient, demonstrating that the customers of ACN saw the outsourcing services ACN was providing as vital to operations.
Year to date, ACN has also outperformed both the market and comparables companies such as IBM and Cognizant Technology Solutions Corporation (CTSH). In addition, it has sold off less than the broader market during the recent selloff, only down 3.10% this month versus 3.57% for the S&P 500.
ACN's earnings have been remarkably stable, consistently averaging an earnings yield of a little over 5.5%. In October 2002, ACN began issuing a dividend with a payout ratio of approximately 33%, providing a yield on average of 2%. This additional stream of cash flows in a company with healthy growth is a nice bonus of owning ACN.
Superior Operational Performance
The main limitation when comparing ACN's operational performance versus competitors is that many of ACN's top competitors are not publicly traded. This includes firms such as McKinsey & Company, The Boston Consulting Group and Bain Capital. In fact, majority of prominent management consulting firms are not publicly traded, and ACN was only listed in 2001.
Therefore, when evaluating ACN's operational performance versus competitors, this caveat must be kept in mind.
Making do with what is available, I'll be comparing the operational performance of ACN versus the following 6 companies.
These 6 companies are all above $900 million USD market cap and provide consulting services.
Starting first with price performance, since January 1st 2001, ACN has had the top share price performance along with Huron Consulting Group (HURN), returning just over 60%.
I've compared the operations of the 6 companies using 2 different operational metrics.
The 1st chart compares Return On Assets (ROA), which is calculated by dividing net income by total assets.
Net Income / Total Assets = Return on Assets
This provides insight as to how much of a return a company is generating versus its total assets. The advantage to this metric is in its simplicity, the disadvantage is that net income is potentially subject to accounting creativity.
ACN generates the best ROA versus comparables, and more importantly, the ROA is growing. Versus competitors, ACN makes far better use of its assets to generate shareholder wealth.
The 2nd chart compares Return On Equity (ROE). ROE is similar to ROA, but it measures total income as a percentage of shareholder equity. ROE demonstrates how well a company uses shareholders money to generate earnings growth.
Net Income / Shareholders Equity = ROE
Once again, ACN is leading the pack, although lagging behind IBM. What is especially impressive about ACN's outperformance is that ACN is much larger than the consulting companies in the comparables group other than IBM, yet still operates more efficiently for shareholders. Below is a table of the market capitalizations of each firm.
By both ROA and ROE metrics, ACN is among the best of the publicly traded firms.
It is clear that ACN is a world class operation, but owning a great company at an expensive price is not a recipe for investment success. Owning a great company at a good price is. ACN has rallied over 300% since inception, therefore the question is, is ACN currently available for a good price?
Using the same comparables used during operations, I've compared ACN on 3 different valuation metrics.
The 1st is a basic Price to Earnings Ratio (PE). Price to earnings is a good starting point, but I'm always cautious when using it as it is a lagging indicator. There are many examples of companies that seemed cheap on a PE basis, then the next round of earnings was released, making them expensive once again. One company that comes to mind where this was the case was BlackBerry (BBRY).
On a PE basis, Accenture is not relatively expensive despite the impressive stock price history. In addition, earnings are to be released June 27th, and if they're strong, ACN could be even cheaper on a PE basis.
The 2nd valuation measure is the Operating PE Ratio. This is similar to the standard PE ratio, but the earnings used exclude tax effects, non-operating income and expenses, discontinued operations, extraordinary items, preferred stock dividends and accounting change differences. It focuses on how well the company generates earnings operating and how much you pay for those earnings. Below is the formula.
Market Capitalization / TTM Operating Earnings
Although ACN is still reasonably priced by this metric, it is by no means cheap. It is also trading closer to the top of its range, perhaps indicating that now is not the best time to buy. Once again, June 27th earnings are just around the corner, so a strong number could make ACN a great value again.
The last valuation metric utilized is Enterprise Value to Free Cash Flow. Enterprise value is the hypothetical takeover price excluding goodwill, such as the value of the branding, using just market capitalization, debt and cash to determine the value of the company. Free cash flows have the same benefits as using operational income numbers, as there is no manipulating cash in the bank.
Enterprise Value = Market Capitalization + Debt - Cash
Enterprise to Free Cash Flow Ratio = Enterprise Value / Free Cash Flow
By this measure, once again ACN appears to be reasonably priced. It is trading at the higher end of its range, but versus competitors it appears fairly valued.
Accenture Is A Buy
ACN outperforms competitors across a variety of operational metrics, yet is still valued competitively. This makes ACN a great addition to a portfolio. In addition, the 2% dividend is fantastic in a world of 0% interest rates. Even if you miss the bottom in the pullback in stock prices that began this month, you are earning far more on your cash than if you kept it in your bank account. And with earnings tomorrow at the time of this writing, the valuation may be even better in 24hrs.
With ACN, you are not buying a great company at an expensive price, but a great company at a good price. This is a recipe for investing success.