With the rise of the "new" tech world (Facebook, Twitter, Apple) and the slow resurgence of "old" tech (Microsoft, HP, Oracle) there is one company that has been able to grow organically at high single digits while creating incredible returns on equity for investors over the last 10 years. This company has generally flown under the radar but has a very impressive moat and client base which makes its services almost indispensable in the world of large corporate and government systems implementation. The company has generated ROIC and ROE north of 54%, ROA north of 16%, an operating margin of near 14% and over the past 10 years has a CAGR of 21.57%, beating the market and its competitors handily.
What is this mystery company and what is the investment thesis?
I am talking about none other than Accenture (ACN). This $56bn company, which generated over $30bn in revenues in 2014, is at the forefront of innovation, research, implementation and execution of some of global businesses' largest projects and problems. Some might think of this company as just some global consulting firm with the crux of its business based solely on "human capital" but this business has over 2400 patents and very deep infrastructure technology platform relationships with names like Cisco, salesforce.com, Workday, Microsoft, SAP and Oracle.
Before I get into some of the main catalysts for Accenture, let's first take a look at its valuation conducted earlier in the fall through our good friends at Levered Returns:
WACC Analysis
http://leveredreturns.com/models/acn-q4-14/v1/wacc/
DCF Analysis
http://leveredreturns.com/models/acn-q4-14/v1/dcf-short-5yr-ebitda/
The price as of October 13 was $76.29 implying a 29.2% discount from fair value (and the most recent price of $83.73 as of December 10 implies a 22% discount so we are not far off). It is important to note the conservative nature of this valuation since a recent release from the company implied 2015 growth projections of 4-7% and revenue in its most recent quarter was up 8% with high single and double digit growth coming from its healthcare, communications and products divisions respectively. If one were to adjust the growth rate to 6% throughout, which is not an unreasonable estimation, the company's fair value reaches above $100 and with enough patience and discipline, this company will be worth much, much more. Since 2005, the company's revenue has more than doubled, net income has more than tripled and free cash flow growth YOY has increased 7.86% implying a company with very strong cash generating capabilities. Moreover, the company boasts a healthy 43% dividend payout ratio, which gives the company plenty of opportunities to increase its dividend substantially, which will only enhance shareholder value.
It is obvious Accenture is a cash generating machine, but what are some of the main growth catalysts for the company in the future?
The answer to this question can be summarized in one word: digital. Currently, the company is focused on revolutionizing large enterprises through a unique method. Rather than integrating and incorporating large clients with new technology, Accenture sees large organizations reinventing themselves in the digital world. The trends are on Accenture's side: in a recent study by McKinsey, "35 percent of B2B pre-purchase activities are digital, which means B2B companies need to invest in web sites that more effectively communicate the value of their products, SEO technology to make sure potential customers are finding them, and social media monitoring to spot new sales opportunities." Accenture is betting that this trend in digital marketing, media and design will continue given its recent purchase of Relative Media.
Moreover, the WSJ has predicted by 2020 that "the network of physical objects accessed through the Internet that contain embedded technology to sense or interact with their internal states or the external environment will hit 26 billion units". Accenture is betting on a more integrated and digital world, and it is helping prepare businesses for this brave new world. An example of this is its work with GE. As stated in its Technology Vision 2014, "GE is betting on the industrial Internet, building cloud-based services with intelligent analytics so that it can collect and combine vast amounts of industrial-machine data and equipment data, extracting unique insights to be used to set new performance standards in major industries such as energy and aviation." Accenture, with its size, scale and very capable 300,000+ workforce is one of only a handful of large tech processing players who can implement such a system seamlessly and the proof is in the pudding - the company invested over $640 million in 2014 on innovation, research and development to help businesses transform in the new digital landscape.
This new digital world that Accenture is betting on is meant to transform global commerce forever. From supply chain management, consumer behaviour, business applications, analytics to smart machines, digitally integrated cyber security and new digital business architecture, Accenture has focused its core operating divisions on a vision that is unlike many other large tech names. Companies like IBM may be catching up to the cloud revolution and companies like HPQ or Microsoft may be reorganizing their business models yet Accenture always seems to be one step ahead of the game. Accenture has managed to develop a very specific growth platform focused on what it believes will revolutionize business. Although it is still early, I believe transformative digital trends will shift big global business practices and Accenture is uniquely positioned to accommodate this shift.