Accenture: Growth With A Sound Business Model

Summary

• Accenture has a solid history of earnings growth with more growth forecast for 2020.
• The company's management is actively seeking out new markets to boost its future growth.
• Accenture has a sound business model and focuses on both organic growth and acquisitions.

Introduction

Accenture plc (NYSE:ACN) provides technological consulting services to large organizations around the globe. The company has a solid history of growth which is expected to continue through to 2020.

Accenture is well managed with a sound business model that focuses on both organic growth and acquiring their competition (whenever economically viable). Accenture's business model may also provide some earnings shielding during periods of economic weakness.

The stock is somewhat expensive but most good growth stocks are expensive; as investors are happy to pay for future earnings growth. In my opinion, Accenture would make a sound investment with future capital gains potential.

Financials

Accenture has reported financial results for the first quarter ending November 2018 (data from Seeking Alpha and Yahoo). Note: Accenture's financial year starts in September.

The company's revenue was up 5.5 percent and its earnings were up 9.5 percent from the same quarter last year. Over the last five years, Accenture's revenue has grown 6.9 percent per year and its earnings have increased by 9.3 percent per year.

The return on equity is high at 38 percent and the profit margin (profit to revenue ratio) is decent at 10 percent.

The asset ratio (total liabilities to total assets) is 51 percent which means that Accenture's total debt is only 51 percent of the value of everything the company owns (note that the asset value is the book value and not the liquidated value of its assets).

The company's book value is currently around $20 and with a stock price of $156, Accenture is trading at 7.9x book value.

The analysts' consensus forecast is for revenue to increase by 3.1 percent in 2019 and increase by 6.8 percent in 2020. Earnings are forecast to increase by 11.9 percent in 2019 and increase by 9.1 percent in 2020. The 2019 PE ratio is 22x and the 2020 PE ratio is 20x.

Accenture has a solid history of growth which is expected to continue through to 2020.

Pierre Nanterme, Chairman & CEO stated in Accenture's Conference Call:

We continue to see excellent demand for our services - especially in digital, cloud and security, as well as new technologies, confirming the relevance of our growth strategy and the differentiated solutions we bring to our clients".

Pierre Nanterme further stated that with the disciplined execution of Accenture's growth strategy, he remains confident in Accenture's ability to continue gaining market share, driving profitable growth, and delivering value for our clients.

This indicates to me that Accenture will make every effort to continue its earnings growth into the future.

Business Model

Accenture is a leading globally focused company based in Ireland and listed on the NYSE. Accenture is essentially a technology consulting firm and works as a go-between for business and technology with the main goal of increasing productivity for their clients.

Accenture has a diverse range of businesses it services and it's actively seeking out new technological based businesses to serve. As an example of Accenture's diversity, the company has formed a partnership with Google (GOOG) (GOOGL). There are many businesses that are unfamiliar with the cloud technology offered by Google. The technology is vague and businesses tend to avoid what they don't understand. This is where a technology consulting firm like Accenture comes into play.

I think it was a smart business move by both Accenture and Google to form a partnership. The benefit to Google is that they receive Accenture's consulting experience for their potential cloud clients. The benefit to Accenture is that they get a slice of Google's earnings. I think that Accenture figured out that there was more money in forming a partnership than there was in charging a consulting fee. As for Google, I think they were happy simply to receive Accenture's technology consulting services to use to help them secure clients for their cloud services. It's a partnership that benefits both parties.

I like that Accenture is actively seeking out new markets to continue its growth into the future. The company has grown to quite a large organization with a market cap of around $100 billion and 469,000 full-time employees worldwide.

A common fate of large organizations is that they find it more challenging to maintain high earnings growth rates. The all too common tendency is for growth to slow. Accenture appears to be aware of this as they are actively seeking out new markets and at the same time reducing their competition by acquiring their competitors (at least the smaller companies).

Accenture has bought 70 companies over the last three years. As stated in the Shareholder Letter, in the 2018 fiscal year, Accenture spent $658 million on acquisitions which included Mackevision in Germany, Meredith Xcelerated Marketing in the United States, HO Communication in China, and Altima in France. Accenture also completed several acquisitions that included US-based Pillar Technology and Kogentix.

Buying out their competition is a smart business strategy. The main benefit is the reduction of price wars which naturally arise when organizations sell products or need to quote on contracts (such as for consulting firms). The other benefit with acquisitions is that Accenture effectively acquires the skills of their competitors' employees without having to pouch them.

In my opinion, the business model of combining organic growth (by seeking out new markets to expand into) along with buying out and merging the competition into Accenture's business structure provides a good mix to help secure its future growth.

Another aspect of Accenture's business model that I like is that the company operates with little in the way of capital spending and no Research and Development costs. It's Property Plant and Equipment is only 5 percent of its total asset value and Accenture carries no inventory on its balance sheet.

While Accenture is a technology company that deals with technology, unlike other technology companies that develop technology Accenture merely acts as a go-between. This means that Accenture effectively avoids all the Research and Development costs that go with technology companies.

Accenture's business model builds long-term relationships with their clients. As stated in their shareholder letter, Accenture serves more than three-quarters of the FORTUNE Global 500 and 92 of the top 100. Accenture continues to build strong, long-term relationships with their clients (97 of their top 100 clients have been with Accenture for at least 10 years).

This to me indicates brand loyalty and as such gives Accenture pricing power. This would help bolster its earnings during periods of economic weakness. During a weak economy, it's not unusual to see businesses reduce their prices in order to maintain market share.

Being a large organization, Accenture has the financial and employee resources to take on large projects from large global organizations worldwide. These large organizations are a more reliable source of future revenue than the smaller organizations. Large organizations typically have generous budgets (with money to spend on consulting) while the smaller organizations typically have small budgets. Also, large organizations (with their generous cash flows) tend to be reliable payers whereas the smaller organizations tend to be cash strapped and payments can be unreliable.

This puts Accenture in a good financial position as any due payments will almost certainly be paid by these large organizations. Add to this that most of Accenture's clients are long-term loyal clients; this further secures Accenture's revenue over the foreseeable future.

Stock Valuation

Accenture's revenue has increased 6.9 percent per year and earnings increased 9.3 percent per year over the last five years. This shows that Accenture is a growth stock and the PEG (PE divided by the earnings growth rate) is an appropriate method for valuing growth stocks.

The forward annual earnings growth using forecast data is 9.1 percent for 2020. Using the slightly lower 2020 annual earnings growth of 9.1 percent will lead to a more conservative valuation and is more appropriate as it is forward-looking rather than using the historical rate.

With a 9.1 percent earnings growth rate into 2020, this gives a forward PEG of 2.2 with a 2020 PE multiple of 20x.

A forward PEG of 2.2 means that Accenture is overvalued with a current stock price of $156. It is commonly accepted that a stock is fairly valued when its forward PEG is 1.0 which gives Accenture a fair value stock price of around $72.

While Accenture is overvalued, most good growth stocks are expensive as the stock market is prepared to pay a premium for earnings growth. On a PE basis, Accenture is trading at a reasonable 20x multiple for its 2020 estimated earnings. The book value at 7.9x seems high but this disguises the fact that Accenture has little in assets as it's an outsourcing company.

Stock Price Target

As an active investor, I personally like to determine some likely price targets. This gives me a feel for how high the stock price could go in the short term and how soon it could get there.

Accenture chart by StockCharts.com

Examining the stock chart reveals that Accenture has had a fantastic run up in price over the last decade.

Should the stock resume its rally, in the short term, Accenture could easily trade back up to its 2018 high of $174 (which I think it could reach within twelve months or even six months).

Over the longer term, the stock could trade well past the 2018 high and will probably do so as long as Accenture's earnings growth continues.

Stock Price Risks

The stock price pulled back below $140 at the end of 2019 and has since rallied back up to around $156. While there's a chance that the stock could continue rallying, there's also a chance that the stock has not finished with its pullback.

The broader market indices have been trending upwards with a bull market that began in 2009. These market indices have currently pulled back from their highs and it's always possible that this is the start of a bear market.

Should the bear market take hold, then there's a chance that Accenture's stock price will fall along with the rest of the market. If this is the case, I would expect Accenture's price drop to be fairly subdued compared to the market. Accenture has a business model that would reduce the impact of any adverse earnings which should help cushion the effect of a bear market.

Over the longer term, I would expect the stock price to recover from any correction and continue higher in line with Accenture's future earnings growth potential.

Conclusion

Accenture has produced solid growth over the years and management feels confident that this growth will continue into the future. Accenture has a sound business model that focuses on both organic growth and acquiring their competition (whenever economically viable).

The stock is somewhat expensive but most good growth stocks are expensive as investors are happy to pay for future earnings growth.

In my opinion, Accenture is worth buying as an investment for its future growth and capital gains potential. Accenture's business model may also provide some earnings shielding during periods of economic weakness.

Analyst’s 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.