Accenture Continues To Outperform Its Peers And The Market's Expectations

Sep.28.12 | About: Accenture plc (ACN)

Accenture plc (NYSE:ACN) reported fiscal fourth quarter and full-year results yesterday for the period ended August 31, 2012, beating market expectations. The company also issued a forecast for the coming fiscal year that topped Wall Street's estimates.

Accenture reported its results after the market closed, but its stock ended the regular session up $1.03, or 1.6%, to $65.28. After the market digested the Q4 and full year FY2012 financial results and management's outlook for the coming year, Accenture's stock jumped $2.63, or 4.0%, in after-markets trading to $68.01.

I have been long Accenture's stock for many years and believe the stock is a compelling long-term hold for any investor. I list below several reasons why I own the stock and why I believe the company will continue to perform well in the future.

Large, Global, Diversified and Scalable Business

Accenture is a global management consulting, technology services and outsourcing company, with 257,000 employees serving clients in more than 120 countries. Accenture is diversified by work type, geography, and industry segment.

In terms of work type, Consulting constitutes 56% of the company's net revenues, with Outsourcing comprising the remaining 44%. In terms of geography, net revenues are divided amongst the Americas (45.0%), Europe/Middle East/Africa (40.5%), and Asia Pacific (14.5%).

Although Asia Pacific represents its smallest geography, it also represents the company's fastest growing region, with 18% revenue growth in FY2012 in local currency terms (versus 13% growth in the Americas and 8% growth in EMEA).

Lastly, Accenture operates through five industry operating segments, including Communications/Media/Technology (21% of revenues), Financial Services (21% of revenues), Health & Public Service (15% of revenues), Products (24% of revenues) and Resources (19% of revenues).

Very few companies have the breadth and depth of capabilities, global reach and scale, and relationships within the c-suite to compete with Accenture. Accenture is able to win substantial contracts with large multinational companies where small or mid-sized consulting and technology firms cannot compete. For example, Accenture's capabilities and scale allowed the company to win bookings of over $100 million at 11 different clients in FY2012.

Any sort of change creates opportunities for Accenture to provide its services to clients. Regardless of whether overall business conditions are good or bad, Accenture is able to identify ways to help clients improve their performance. Clients struggling with the demands of globalization, regulation, cost cutting, growth and innovation, or technological change will all turn to Accenture for their needs.

Strong and Growing Free Cash Flow Generation

Accenture generates significant free cash flow due to its robust operating margins and low capital requirements. As a result, the company is able to convert a very high percentage of its EBITDA into free cash flow. In FY2012, free cash flow (defined as cash flow from operations less capital expenditures) was $3.9 billion, or 78% of EBITDA of $5.0 billion.

Free cash flow of $3.9 billion was approximately $400 million above the top end of management's previous guidance. The company has been able to grow its earnings and cash flow at a level substantially above revenue growth. In the last five years, Accenture has grown net revenue by 4.5% per year, while free cash flow has grown 11.8% per year, demonstrating the considerable scale and operating leverage inherent in its business.

Pristine, Fortress-like Balance Sheet

Accenture has a remarkably strong balance sheet with over $6.6 billion of cash as of August 31, 2012 and no material debt. Accenture's robust liquidity position provides the company with the financial flexibility to make small acquisitions and return cash to shareholders through regular open-market share repurchases and semi-annual cash dividends.

Returning Cash to Shareholders

Accenture returned more than $3 billion to shareholders in FY2012 through a combination of share repurchases ($2.1 billion) and cash dividends ($950 million). That represented a slight increase from FY2011 when the company returned $2.8 billion to shareholders through $2.1 billion of share repurchases and $644 million of cash dividends.

Accenture announced an increase to its semi-annual cash dividend to $0.81 per share, a 20% increase over its previous semi-annual cash dividend of $0.675 per share. Based on its current share price and an annualized cash dividend of $1.62 per share, Accenture's cash dividend yield is 2.5%.

Accenture's total remaining share repurchase authority at August 31, 2012 was approximately $4.2 billion (roughly 1% of shares outstanding at the current stock price).

Strong Outlook with Extraordinary Visibility

Accenture's management provided favorable guidance for FY2013 (above consensus estimates). The company expects net revenue growth in the range of 5-8% in local currency terms. Fully diluted EPS is expected to be in the range of $4.22-4.30, an increase of 10-12% over diluted EPS of $3.84 in FY2012.

Operating margin for FY2013 is projected to be in the range of 14.0-14.1%, an expansion of 10 to 20 basis points over FY2012 operating margin. Cash flow from operations is expected to be in the range of $3.2-3.5 billion, with property and equipment additions of $420 million, resulting in free cash flow of $2.8-3.1 billion. Lastly, the company is targeting new bookings for fiscal 2013 in the range of $31-$34 billion.

The company achieved record new bookings of $9.2 billion for the fourth quarter of FY2012, bringing the full year total to $32.2 billion, which was $1.2 billion above the top end of the company's guided range. This record high level of new bookings provides extraordinary visibility to the company's near-term outlook and financial performance.

Current Valuation

At its current stock price of $65.38, Accenture has a market capitalization of $45.0 billion and a total enterprise value of $38.9 billion. Based on its FY2012 financial performance, Accenture trades at 1.4x net revenues, 8.7x EBITDA, and 17.6x net income.

In addition, the company sports a 8.6% free cash flow. Accenture has performed at a high and consistent level for many years, and the strength of its management team and global scale of its business justify a premium valuation to its peer group.

Most Wall Street analysts have a price target on Accenture's stock in the high $60s to mid-$70s based on applying a 16-17x earnings multiple to FY2013 EPS ranging from $4.35-4.41. Overall, I believe Accenture's stock is fairly valued in the high $60s and represents a good long-term buy at this price. I would add to my holdings if the stock were to pull back to the low $60s and add substantially more in the $50s.

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.