Undervalued Accenture Plc: A Golden Opportunity

| About: Accenture plc (ACN)

Summary

Accenture's entire portfolio is growing impressively which demonstrates that the company is successfully managing its growth across operations and boundaries with great consistency.

Looking forward the company has huge potential to expand across multiple fronts including digital technologies, advanced analytics capability and cloud platform.

Based on this discussion, the stock is currently undervalued by 13% and deserve a strong Outperform recommendation.

Accenture Plc Accenture Plc (NYSE:ACN) impressed us with a resoundingly solid growth, which was diverse, both geographically and operationally. The growth results posted mostly strong double-digit increase in core business segments and across geographies with 11% in North America and 12% in Europe. Revenues were $60 million above the upper end of guided range, primarily driven by stronger than expected consulting revenues. Margins improved overall, despite pressures from increased penetration by GDN from 68% headcount to 75%. Before we go into the details of our analysis and expectations, here is a snippet of what we think of this stock:

ACN is a strong Outperform stock with a TP of $111 representing the potential to bank on its clientele and bookings and increase its footprint through its market potential while improving its operational efficiencies.

Returns outweigh risks

Accenture Plc. announced a solid set of 1Q16 results that reflect 10% constant currency growth, and 1% ahead of top end of management 6-9%. The company's highlights over the quarter included strong consulting bookings, reflecting 24% growth in local currency over last year, fueled by demand for digital related services across Accenture Strategy, Accenture Consulting, and Application Services.

Moreover, operating profit margins expanded 0.2% to 15.2%. However, the growth increase and improved margins did not reflect effectively with all entirety in EPS as higher than expected tax offset the momentum of earnings and EPS fell short of 3% from the consensus while operating cash flow fell 30% year over year. However this offset in EPS is short lived and cannot shake our faith in ACN as the demand growth continues to increase across geographies and margins improve over time favoring the case of this stock. Moreover the negative effect of increased tax is more of a one-timer impact and will reverse through the rest of year, allowing for growth to go its direction, unhampered.

Diverse growth promises bright future

Accenture's entire portfolio grew impressively, showing the potential of the company in managing its growth across operations and across boundaries. What stood out was not the fact that ACN improved its growth numbers but the fact that it could do so in almost all of its business segments and that too with great consistency. Digital-related services grew over 20% in constant currency terms (local currency) and fueled strong double-digit growth in strategy and consulting services combined. Operations in application services came in as expected with high single-digit growth and mid single-digit growth respectively. Communications, Media & Technology grew 12% QoQ and marked the sixth consecutive quarter of double-digit growth. This shows the company's ability to sustain profitability over long term. Moreover, growth was multi-dimensional and across borders as double-digit growth was recorded in North America and in Europe with 11% and 12% growth respectively. Industrial and life sciences industries also solidified the strong momentum of 12% growth for Products in Europe and growth markets. These growth numbers of Q1 have paved way for the second quarter's potential expansion based on strong pipeline and strong bookings.

Expectations from ACN

Looking at the growth momentum of Accenture we believe that the company has quite successfully embarked on the journey uphill. Looking forward the company has huge potential to expand across multiple fronts including; unleashing innovative ways of providing value through digital technologies, banking on their advanced analytics capability as the likes of Accenture Insights platform and last but not the least enhancing the scope and scale of Accenture cloud platform as hybrid cloud solution. Conclusively we see a very promising year for Accenture and believe that not only will it post convincing growth numbers but will also deliver shareholder value year over year. The figure below illustrates our forecast for quarterly EPS.

Financial Valuation

The following is an excerpt of the financial performance of Accenture Plc. All the figures below are given in $ millions except for percentages.

Metrics/Years

FY11

FY12

FY13

FY14

FY15

Revenue

27,353

29,778

30,394

31,875

32,914

Revenue growth

18.44%

8.87%

2.07%

4.87%

3.26%

EBIT margin

12.97%

13.01%

13.38%

13.44%

13.67%

Depreciation/revenue

1.88%

1.99%

1.95%

1.95%

1.96%

Capital spending/revenue

1.48%

1.25%

1.22%

1.01%

1.20%

Changes in working capital/revenue

-1.06%

-0.10%

0.70%

2.43%

-0.42%

FCFF

2988.8

3039.8

3345.2

2694.5

3719.5

FCFF growth

N/M

1.70%

10.05%

-19.45%

38.04%

Click to enlarge

Source: Company 10-Ks

In order to derive financial valuation, we have taken into account the above-mentioned factors and extrapolated recent past averages to forecast future trends. The table below summarizes the key assumptions for projections till 2021.

Metrics/Years

FY16E

FY17E

FY18E

FY19E

FY20E

FY21E

Revenue growth

4.50%

6.30%

6.70%

7.10%

7.40%

7.50%

EBIT margin

14.40%

14.70%

14.86%

14.93%

15.10%

15.28%

Depreciation/revenue

1.96%

1.95%

1.96%

1.96%

1.96%

1.96%

Capital spending/revenue

1.20%

1.22%

1.18%

1.17%

1.16%

1.19%

Changes in working capital/revenue

-0.71%

0.14%

-0.84%

-0.88%

-0.95%

-1.61%

Click to enlarge

With regard to capital structure, the company has only 0.03% debt based on market value. When funneled through the discounted cash flow (DCF) valuation method and assuming terminal free cash flow to firm (FCFF) growth of 2%, the enterprise value turns out to be $90.17 billion. Taking into account long-term debt of $27.4 million, the equity value came in at $90.14 billion. Assuming 809.5 million outstanding shares, the intrinsic value of stock is estimated to be $111.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.