Accenture's Q3 2018 Results: A Company That Is Firing On All Cylinders

Summary

• Accenture reported Q3 2018 results that beat the top- and bottom-line estimates.
• The company is firing on all cylinders, and investors should expect for more of the same in the quarters ahead.
• ACN shares are still a long-term buy even at today's price.

Accenture (NYSE:ACN) is one of the few companies in the R.I.P. portfolio that continues to perform well in today's environment and, as a result, the market has rewarded shareholders with a rising stock price. Since I first wrote about Accenture in early 2017, ACN shares have outperformed the broader market by a wide margin.

ACN data by YCharts

I still believe today that Accenture is worthy of your investment dollars, even with the stock sitting at [or close to] all-time highs because this company is well-positioned for the changing digital economy. It also helps the bull case that management continues to produce impressive operating results quarter after quarter.

What Have You Done For Me Lately?

On June 28, 2018, Accenture reported better-than-expected Q3 2018 financial results. The company reported Q3 2018 adjusted EPS of $1.79 (beat by $0.07) on total net revenue of $10.31B (beat by $270M). For comparison purposes, the Q3 2018 net revenue and adjusted EPS increased by 11% and 18%, respectively when compared to the same period of the prior year.

Additionally, as shown, the company reported strong results across the board. 3 out of 5 Operating Groups had double-digit net revenue growth - the other 2 had high single-digit growth - and the company experienced strong demand in all three of the geographic regions that it operates in.

During the conference call, management highlighted Consulting (up 12% YoY to $5.69B) and Outsourcing (up 10% YoY to $4.63B) as two areas that had a real impact on Accenture's net revenue growth for Q3 2018. However, the company's digital, cloud, and security services businesses (i.e., "The New") continues to be the key growth driver for Accenture.

The New now accounts for ~60% of Accenture's net revenue (up from 50% in Q3 2017) and, as described during the company's Investor & Analyst Meeting in April 2018, management believes that the prospects for this business improve almost every day.

When taking a step back, I believe that Accenture is properly positioned for the ever-changing digital transformation that is occurring across the globe. And to put the company's potential market opportunity into context, the global Internet Of Things ("IoT") market is expected to grow from $157B in 2016 to $457B by 2020 (a CAGR of 28.5%):

Source: Forbes Article, December 2017

Accenture is the go-to service provider in the digital space, so, at the end of the day, the company should be a direct beneficiary to the growth that is expected in the years ahead. The company has already been firing on all cylinders but, more importantly, management expects for more of the same through the end of fiscal 2018:

Metric	Previous Guidance	Updated Guidance
Net revenue growth	Range of 7%-9%	Range of 9.5%-10%
Adjusted EPS (excluding tax law changes)	Range of $6.61-$6.70	Range of $6.66-$6.71
Operating cash flow	Range of $5.2B-$5.5B	Range of $5.5B-$5.8B
Free cash flow	Range of $4.6B-$4.9B	Range of $4.9B-$5.2B

Click to enlarge

These are meaningful increases for almost every metric, so investors should expect for ACN shares to perform well as the company heads into fiscal 2019. Let's also not forget that Accenture's stock is still reasonably valued, even after the recent run-up.

Valuation

Accenture's stock is trading at a premium when compared to its peers, but the company is attractively valued when compared to the average P/E ratio for the IT Services industry.

Source: Fidelity

Lastly, as I previously described in this article, I believe that Accenture deserves to trade at a premium because the company is the leader in multiple high-growth areas. In addition, Accenture being a shareholder-friendly company - the board recently approved a dividend increase of 10% and management repurchased $720M worth of shares at an average price of $153.60 during Q3 2018 - also helps the bull case for Accenture.

Risks

As described throughout this article, Accenture is highly levered to the digital space, so any major disruption to The New would significantly impact the company's business prospects.

Additionally, reputation risk is an importation consideration because Accenture is the go-to consultant in its industry. Specifically, ACN shares are trading at a premium to its peers (and the market), so a negative shift in investor sentiment would materially impact the company's stock price.

Bottom Line

The major takeaway from Accenture's Q3 2018 results is the fact that it appears that management has this company well-positioned for the future, especially in the digital consulting space. Moreover, the market conditions for Accenture continue to improve and this should bode well for the company (and its shareholders) over the next five plus years.

The company has plans to return a material amount of capital to shareholders over the next year, and management believes that the growth for The New (i.e., Accenture's key growth driver) is still in the early innings. As such, investors with a time horizon longer than two-to-three years should consider any significant pullbacks as buying opportunities.

Author's Note: All images were obtained from Accenture's Q3 2018 Earnings Presentation unless otherwise noted.

Disclaimer: This article is not a recommendation to buy or sell any stock mentioned. These are only my personal opinions. Every investor must do his/her own due diligence before making any investment decision.

Disclosure: I am/we are 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.