Over the past 10 years, Accenture (NYSE:ACN) has been consistently growing faster than what the market claims. My analysis shows that, should ACN continue to grow its earnings, book value and free cash flow on a steady basis, the company should be worth $113-$115 a share.
Accenture is a leading international management-consulting, technology, and outsourcing firm that was previously the consulting arm of Arthur Andersen. ACN has five different operating segments: communications, media and technology; financial services; health and public services; products, and resources. Recently, Accenture has cited that the poor global economy has contributed to contracts converting to revenues at a slower-than-usual pace, and per its 10-K, Accenture noted that it expects revenues to decline modestly or grow at a small rate in the near term. The 10-K also states that the company has been experiencing growth in the field of emerging technology (analytics, cloud-computing, and mobility), which has fallen in line with Accenture's increased weight on catching the faster-growing technology trends.
Accenture has been committing itself to its strategy of allocating more of its cash for acquisitions. Much of its acquisitions were used to tap into faster growing technology and industrial markets (analytics, cloud-computing, insight-driven health, interactive/digital marketing, mobility and smart grid), as well as gaining international market share.
As per its Q1 2014 earnings transcript, CEO Pierre Nanterme stated on the matter of acquisitions:
At the same time, we continue to invest in strategic acquisitions to further differentiate our capabilities in key growth areas. Earlier this month, we finalized the acquisition of Procurian, making Accenture the clear leader in procurement BPO ... we are expanding our product life cycle management services through the acquisition of PRION Group and PCO Innovation, which will enhance our ability to help automotive and industry equipment companies deliver products more quickly and efficiently.
Accenture competes with the likes of IBM (NYSE:IBM), Cognizant (NASDAQ:CTSH), Computer Sciences Corporation (NYSE:CSC), Infosys (NYSE:INFY), Wipro (NYSE:WIT), as well as plenty of private companies. Out of those five public companies, Accenture is the second largest in terms of market-cap. IBM leads with around $195B. In terms of multiples, Accenture trades in line with its competitors at a P/E of 17, a P/B of 10, and a P/S of 1.9. While its P/B is considerably high, I believe the premium is warranted due to the company's high profitability and the intangible nature of its business, as well as its ability to grow faster than the market (I will quantify this ability in a little bit).
As far as pricing power is concerned, I don't believe Accenture will benefit from any such ability, but its ability to continue to gain market share through acquisitions will serve as a competitive advantage, and because the company is highly diversified it will continue to thrive even if it does experience rising pressure from competition. As stated by the CEO when questioned about the fierce competition and pricing power:
I mean, the competition I would characterize as pretty stable across the patch. I mean, as you know, we're competing against the same range of competitors. Now, it is true that in some parts of the world, and I'm thinking about, again, consulting Europe, Brazil, as it has been mentioned before, resources and more natural resources, when the market is softening a bit, then the level of competition is naturally increasing and putting more pressure on pricing and on competition there. But I would characterize that piece as quite concentrated on a few areas of the business, the one I just mentioned before, specifically those 3. For the rest of the business, I believe that the competition is pretty stable.
I would also like to point out that Accenture has been the most profitable and efficient of all of its competitors in terms of return on invested capital (ROIC) and return on equity (ROE). ROE has been around the 50%-70% mark consistently since 2004, and ROIC has also been around the 50%-70% mark since 2004. No other of the mentioned competitors has experienced such high rates of value creation for the same time period.
With Accenture's ROIC around 2.3x the average of IBM, Cognizant, and Infosys's ROIC, it is clear to me that ACN has a much better track record of creating value (11years worth) than its competitors.
Undervalued Going Into 2013
I took a different approach going about valuing ACN. I pretended that it was 2009 and that I was considering investing in the company back then. For some reason I acquired the magical power of forecasting ACN's future free cash flows exactly (2,053, 3,038, 3,885, 2,934, in millions). Using a DCF model, assuming a discount rate of 15%, and a terminal multiple of 8 (historically, FCF multiples for the company have been around 11-19x), I obtained a fair value of $113 for 2009. Accenture has yet to hit that target price, and I believe there may be even more upside as the company has grown considerably since then.
Using a residual earnings model in valuing the shares in 2009, I assumed a discount rate of 12% and a terminal multiple of 8. I obtained a fair value of $92 using that model, and because ACN has a history of having high P/B's (around 8-11x), I believe a more accurate value would be $115 (using 10x). Because these models are valuing the stock in 2009, I believe ACN may have even more upside potential, considering that the future does look rosy for shareholders. To keep it safe, though, it is almost certain that ACN should have near-term upside of 37%.
Rosy Future for Shareholders
Recently, Accenture raised its semi-annual dividend to $.93, a 14.8% increase from its April 10th dividend of $.81. A raise in dividends is usually a sign that management is confident about the business, and it is obvious that they should be. Accenture has 11 years' worth of evidence that it can generate substantial amounts of FCF. For fiscal 2014, management forecasts that it will hit a FCF amount of $3.2-$3.5B, which is around a 9% increase. ACN also does not have much debt (debt to cash ratio of .006%), and therefore much of that FCF will be lying around for the benefit of the shareholders. In fact, 93% of FCF has been returned to shareholders since ACN's IPO (source: IA day CFO slides).
While slow economic growth and fierce competition may affect Accenture negatively in the near term, the company's strong track record of value creation and consistent innovation in keeping up with profitable trends, as well as returning cash to shareholders, should shout "buy" to any passing investor. There is considerable upside (at least 37%), and I would not hesitate going long.
Disclosure: I am long ACN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.