Accenture plc (NYSE:ACN), founded in 1995, provides consulting, technology services, and outsourcing solutions worldwide. The Dublin, Ireland-based company serves the communications, high technology, electronics, media, and entertainment industries in Europe, U.S., the Middle East, Africa, and Asia-Pacific. The company has over 220,000 employees in more than 120 countries.
As of Sept. 6, Accenture stock was trading at $51 with a 52-week range of $37.22– $63.66. It has a market cap of $34.9 billion. Trailing-twelve-month P/E ratio is 18.2, and forward P/E ratio is 13.1. P/B, P/S, and P/CF ratios stand at 9.4, 1.4, and 11.3, respectively. The 3-year annualized revenue and EPS growth stand at 2.5% and 10.5%, respectively. Operating margin is 12.5%, and net profit margin is 8.1%. The company does not have any debt problems. ACN yields 1.8% for its shareholders.
Accenture has a 4-star rating from Morningstar. While its trailing P/E ratio is 18.2, it has a 5-year average P/E ratio of 21.9. Out of 21 analysts covering the company, 13 have buy, 4 have outperform, and 4 have hold ratings. Wall Street has diverse opinions on Accenture’s future. The bottom line is 7.7% growth, whereas the top-line growth estimate is 16.2% for the next year. Average five-year annualized growth forecast estimate is 11.2%.
What is Accenture's fair value, given the forecast estimates? In this article, the 27th in the series, I will show a step-by-step calculation of Accenture’s fair value using a discounted earnings plus equity model.
Discounted Earnings Plus Equity Model
This model is primarily used for estimating the returns from long-term projects. It is also frequently used to price fair-valued IPOs. The methodology is based on discounting the present value of the future earnings to the current period:
V = E_{0} + E_{1 }/(1+r) + E_{2 }/(1+r)^{2} + E_{3}/(1+r)^{3} + E_{4}/(1+r)^{4} + E_{5}/(1+r)^{5 }+ Disposal Value
V = E_{0} + E_{0 }(1+g)/(1+r) + E_{0}(1+g)^{2}/(1+r)^{2} + … + E_{0}(1+g)^{5}/(1+r)^{5} + E_{0}(1+g)^{5}/[r(1+r)^{5}]
The earnings after the last period act as a perpetuity that creates regular earnings:
Disposal Value = D = E_{0}(1+g)^{5}/[r(1+r)^{5}] = E_{5} / r
While this formula might look scary for many of us, it easily calculates the fair value of a stock. All we need is the current-period earnings, earnings growth estimate, and the discount rate. To be as objective as possible, I use Morningstar data for my estimates. You can set these parameters as you wish, according to your own due diligence.
Accenture’s Valuation
Historically, the average return of the DJI has been around 11% (including dividends). Therefore, I will use 11% as my discount rate.
Since we are in the middle of the year, it will be more feasible to take the average of ttm EPS of $3.15 along with the mean estimate of $3.79 for the next year.
E_{0 }= EPS = ($3.15 + $3.79) / 2 = $3.47
Wall Street holds diversified opinions on Accenture’s future. While analysts do tend to impose subjective opinions on their estimates, the average analyst estimate is a good starting point. Average five-year growth forecast is 11.2%. Book value per share is $5.32.
The rest is as follows:
Fair Value Estimator | ||
V0 | E_{0 } | $3.47 |
V1 | E_{0 }(1+g)/(1+r) | $3.48 |
V2 | E_{0}((1+g)/(1+r))^{2} | $3.48 |
V3 | E_{0}((1+g)/(1+r))^{3} | $3.49 |
V4 | E_{0}((1+g)/(1+r))^{4} | $3.50 |
V5 | E_{0}((1+g)/(1+r))^{5} | $3.50 |
D | E_{0}(1+g)^{5}/[r(1+r)^{5}] | $31.83 |
BV | Equals | $5.32 |
Fair Value Range | Lower Boundary | $52.74 |
Upper Boundary | $58.06 | |
Potential | 13.85% |
I decided to add the book value per share so that we can distinguish between a low-debt and a debt-loaded company. The lower boundary does not include the book value. According to my 5-year discounted-earnings-plus-book-value model, the fair-value range for Accenture is between $52.74 and $58.06 per share.
As of Sept. 6, Accenture was trading at a price of $51. I like Accenture as a company. The company has a systematic growth through diversified sectors with a successful business strategy. I see great growth potential as well. However, the market has already priced this potential. The current price of $51 reaches the lower boundary of my fair-value range. On the other hand, the stock has 13.85% upside potential to reach the upper boundary of its fair-value range.
O – Metrix Confirmation
If the math above looks too complicated for you, try estimating the fair value using the O-Metrix as such:
O-Metrix = [(Dividend Yield + Growth Estimate) / (P/E Ratio)] * 5
- Dividend Yield: Higher is better.
- EPS Growth: Higher is better.
- P/E Ratio: Lower is better.
The back-testing of this valuation technique on 40 large-caps shows that O-Metrix works very well over the long-term, such as five years. I am also continuously checking on specific sectors, and the formula works very well so far.
What is the O-Metrix Score?
- Accenture has a yield of 1.8%. Therefore the yield is 1.8.
- Growth estimate is the same as the discounted earnings model and is equal to 11.2%.
- Since we are at the middle of the year, taking the average of ttm (18.2) and forward (13.1) P/E ratios will smooth the results. Thus, the average P/E ratio to be used in the model is 15.65.
O-Metrix = [(11.2 + 1.8) / (15.65)] * 5 = 4.15
Depending on the benchmark chosen, the market has an O-Metrix score range between 4 and 5. Accenture’s O-Metrix score of 4.15 is within fair-value range. Back-testing of this ranking system shows that companies with higher-than-average O-Metrix scores beat the market with lower volatility. At a price of $51, the company is trading within the C-Grade, average-return zone.
Summary
Accenture’s stock has always been priced at a premium due to its high growth potential. The average P/E ratio in the last 5 years was 21.9. However, it is trading with a lower P/E ratio of 18.2, and a forward P/E ratio of 13.1. In the last 5 years, annualized EPS growth was 11.31%. With a market cap of $34.9 billion, I expect the growth to keep its pace.
As of Sept. 6, Accenture was trading at $51, at the lower boundary of my fair-value range of $52.74 and $58.06. The stock does not have a debt problem. With a profit margin of 9.15%, Accenture offered 1.8% dividend yield last year. The stock has 13.85% upside potential based on 11.2% EPS growth estimate. Analysts also agree with me: The mean intermediate target price estimate is $64.65, implying significant upside potential. Accenture pays decent dividends and is priced with a fair P/E ratio. I think the current price fairly values the company’s growth potential.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.