With so many companies flush with cash and continued uncertainty about growth prospects, companies tend to look for ways to reduce costs. One way to do this is to develop efficiencies within technology and information systems, including the possibility of outsourcing of certain functions to lower-wage countries.
Herein lies Accenture, at the focal point of a business strategy that continues to gain traction and will only accelerate in an environment where corporate revenue growth has such murky visibility.
Accenture (NYSE:ACN) is a global leader in providing comprehensive consulting and technology services to clients around the globe. It has both the geographic breadth and depth of both industry and business process expertise to lead change in organizations that are looking to become the best in their respective industries. It doesn't matter what industry, as Accenture has 17 focused industry groups, with expertise not only along industry lines, but functional lines as well. In my opinion, there is no other company that can offer the scope of services that Accenture can offer from 200 offices in 53 countries around the world.
The reason we are so positive on ACN is because they are consistently at the forefront of secular trends in globalization, mobility, and cloud computing, among others. They already have a pipeline of several billion dollars in a segment of the business that can reach $50B, and are one of the premier business process outsourcing firms in the world.
In their latest earnings report, Accenture reported bookings growth of 14% year over year within consulting, and 22% growth in outsourcing. While much of the consulting growth was driven by supply-chain cost savings and business transformation, the more exciting prospects are in outsourcing, with multi-year contracts and predictable revenue streams. For corporations in transition, outsourcing offers them the capability to migrate to a variable cost structure that will smooth out margins even when sales growth is slow.
Financially, the company has no long-term debt, a current ratio over 1.5, and free cash flow of $3.6B. And another plus, the stock pays a dividend of over 2%. With operating margins slowly expanding to a recent level of 13%+, ACN is well positioned for any pullback in tech spending over the short-term and while it is a volatile stock, the dividend and financial position will provide a nice cushion if markets turn south.
Not only do we like the story, we also like the valuation. Accenture is currently trading at a discount to its 5-year average price earnings, price to book, and price to cash flow. The consensus price estimate on Bloomberg is $69.28, but we think the company has an intrinsic value of $82, calculated using our proprietary methodology.
In the short term, we do see some risks. Namely, the possibility of reduced spending by corporations during times of uncertainty and slower growth. But we think this risk is mitigated by the fact that companies are awash with cash and understand that in a slow growth environment, the only way to grow earnings is to reduce costs. Other risks include the ability to attract and retain talent and the underperformance of outsourcing contracts. Regarding the talent issue, we feel that the current labor market situation is conducive to attracting adequate talent for reasonable costs. A situation that could worsen as the job market improves but which is currently very advantageous for 'picking the best'.
Accenture is considered a technology company and though we disagree with that (Business Services is probably more appropriate), it is definitely driven by the same factors that drive technology spending and technology stocks. We feel strongly that they are well positioned for growth in this market environment and will be a nice addition to anyone's well diversified portfolio.
Disclosure: I am long ACN.