Accenture: Stick With This Winner

Summary

• Accenture's stock is down big so far in 2020.
• However, the company recently reported solid Q2 2020 results that beat the top- and bottom-line estimates.
• I hold a position in Accenture, and I plan to add shares on any pullbacks. As such, I believe that investors should consider sticking with this winner.

Accenture's (NYSE:ACN) stock has been pulled down by the COVID-19 related concerns, and rightfully so, as the impact on economic activity has already been significant. But, ACN shares are only slightly underperforming the broader market over the first 2+ months of 2020.

Data by YCharts

However, let's also remember that Accenture has outperformed the broader market over the last 1-, 3- and 5-year time periods. Simply put, this company is a winner. So yes, there are company-specific risk factors that need to be considered, especially given the broader market uncertainty, but I believe that Accenture's management team has this global IT consulting and outsourcing company well-positioned for the future. As such, I believe that investors should stick with this winner.

The Macro Concerns Are Real

The COVID-19 related concerns should not be taken lightly so, in my opinion, it makes sense that the market has been in a free fall since the global health scare reached the U.S. The IT industry, and more specifically the IT Services sector, has felt a tremendous amount of pain due to the concerns related to COVID-19.

Source: Fidelity

The sector has moved down in lockstep with the broader market and I believe that this poor performance will likely continue until sentiment (and actual economic activity) shows signs of improvement. To this point, Goldman Sachs expects major cutbacks in consumer activity almost across the board through at last April 2020.

Source: Goldman Sachs

This is not great news for the likes of Accenture, or most other companies for that matter. However, as I recently described, Accenture entered 2020 in a great position - both operationally and financially - the company is well-capitalized and has a balance sheet that will allow for it to weather this storm.

Additionally, it is important to also note that U.S. economic activity is expected to pick back up after Q2 with a sharp 8% bounce-back in GDP predicted for Q3 2020.

Source: JPMorgan

So consider this, the current headwinds are predicted to eventually dissipate later in 2020. It's not a matter of if, but when. Therefore, I believe that investors with a long-term mindset should use this opportunity to add a unique company with great long-term business prospects to their portfolios.

The Latest

On March 20, 2020, Accenture reported Q2 2020 adjusted EPS of $1.91 (beat by $0.18) on revenue of $11.1B (beat by $40mm). These quarterly results also compare favorably to the year-ago quarter.

Source: Q2 2020 Earnings Slides

Other highlights from the quarter:

• Reported double-digit revenue growth (11%) in the company's growth markets, with North America also ticking higher by 11% (to $5.3B)
• New bookings were $14.2B, which is another record for the company
• The operating margin came in at 13.8%, which was a 10bps increase
• "The New" - Digital, Cloud, Security Services - now accounts for more than 65% of revenues (up significantly over the last 2+ years)
• And the company paid another quarterly dividend of $0.80 and bought back

There was lot to like about Accenture's quarterly results but it should also be noted that management lowered their full-year 2020 guidance:

• Revenue growth of 3-6% (down from 6-8%)
• Operating cash flow of $6.15-$6.65 (down from $6.35-$6.75)

The theme - down but not out. Accenture, as expected, will be negatively impacted by the macro turmoil. However, during the conference call, management went to great lengths describing how Accenture will be able to work through the current situation without materially impacting the long-term bullish thesis. Management mentioned these specific points/initiatives:

1. The global management team has already been working virtual for years
2. The company has a standing crisis management committee (led by the COO) that is constantly working through different scenarios
3. The workforce already has a lot of experience working virtually
4. Management has been working for years to digitize Accenture's operations so the company is prepared for more employees working virtually

Make no mistake about it, Accenture's management team will have to navigate this company through a very challenging environment. But, as described by management, they are prepared for the changing landscape. Moreover, I believe that Ms. Julie Sweet, CEO, is the right person for the job. And yes, it does help that she is leading a well-positioned company with promising long range business prospects in an industry that has tremendous growth prospects.

Valuation

Accenture's stock price is attractively valued at today's price.

Data by YCharts

As shown, ACN shares are trading at the lower end of the range. Additionally, Accenture is trading well-below its fair value (per Morningstar).

While ACN shares are definitely not cheap, but let's also remember that Accenture is a shareholder-friendly company (management continues to raise the dividend and buy back shares) that operates in high-growth industry. Therefore, I believe that Accenture will not only grow into its current valuation but also the growth potential is not yet fully baked into the stock.

Risks

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 important consideration because Accenture is the go-to consultant in its industry. Specifically, ACN's 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 Q2 2020 results is the fact that it appears that management has this company well-positioned for the future, especially in the digital consulting space. The market conditions for Accenture will be tough (very tough) but I believe that the company will be able to weather the storm. As such, investors with a time horizon longer than two-to-three years should consider any significant pullbacks as buying opportunities.

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.