Accenture: This Winner Just Keeps On Winning

Summary

• Accenture's stock is outperforming the S&P 500 over the last year. Additionally, the stock is outperforming the broader market over the last 3-,5-, and 10-year periods.
• Shares are currently richly valued, but I believe that the company's growth potential is not fully baked into the stock price.
• We hold a position in Accenture, and we plan to add shares on pullbacks.

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Accenture's (NYSE:ACN) stock has performed well over the last year, as ACN shares have outperformed the broader market by ~3 percentage points over the last 12 months.

Data by YCharts

And while Accenture's valuation is definitely stretched at today's price (we will get to valuation later in the article), I believe that ACN shares are trading at a premium for a good reason - i.e., this company is best-of-breed in several mission-critical categories that are benefiting from the increasing digital transformation that is having a major impact on our economy. As such, Accenture should be viewed as a potential long-term winner.

The Latest: This Winner Just Keeps On Winning

On June 24, 2021, Accenture reported Q3 2021 adjusted EPS of $2.40 (beat by $0.16) on revenue of $13.3B (beat by $450mm). These quarterly results also compare favorably to the year-ago quarter.

Source: Q3 2021 Earnings Slides

Highlights from the quarter:

• Reported revenue growth with a double-digit increase in each of the company's geographic markets
• New bookings were $15.4B, which was a 39% YoY increase from the same period of the prior year
• The operating margin came in at 16.0%, which was a 40 bps increase (hard not to get excited about this improvement!)
• Adjusted EPS of $2.40 represents growth of 26% when compared to Q3 2020

There is a lot to like here. Accenture's management team continues to impress as they have found a way to leverage the improving backdrop (more on this below) to keep this company firing on all cylinders. To this specific point, management again raised their full-year guidance for fiscal 2021:

• Updated guidance: full-year revenue growth of 10% to 11% in local currency; operating margin of 15.1%; GAAP EPS of $9.07 to $9.16; adjusted EPS of $8.71 to $8.80; and free cash flow of $8.0 billion to $8.5 billion
• Prior guidance (from Q2 2021): full-year revenue growth of 6.5% to 8.5% in local currency; operating margin of 15.0% to 15.1%; GAAP EPS of $8.67 to $8.85; adjusted EPS of $8.32 to $8.50; free cash flow of $7.0 billion to $7.5 billion

It also needs to be noted that this management team has raised their guidance in each of the last 3 quarters. That tells you something - i.e., a lot is going right for this uniquely positioned company. As I described in Accenture: Stick With This Winner (March 2020), investors should consider sticking with this company because it is positioned to be a long-term winner. And the company's improving business environment only helps its bull case.

The Backdrop Keeps Improving

I have long talked about how the digitalization megatrend is changing our economy (it is an investment theme that I consistently highlight in my quarterly portfolio updates) and how Accenture, as the go-to IT product and service provider, will benefit from a more connected economy. Things are playing out just as anticipated as Accenture has consistently reported broad-based growth since I started covering the company in 2017.

And in my opinion, Accenture's prospects have improved since the pandemic because the shutdowns forced businesses to accelerate their digital transformations that were already well on their way. For example, Equinix is predicting for digitalization to increase significantly through 2023 (an overall CAGR of 45%).

Source: Insights for the New Digital Economy, September 2020

I could provide a number of different predictions that show how connected the economy may be in 5, 10, or 20 years from now, but I will save you the time. Simply put, digitalization is going to continue to play a critical role in the global economy for many years to come. And the COVID-19 pandemic only added fuel to the fire.

Therefore, investors should be excited about an investment in this industry leader because, in my opinion, Accenture appears to be well positioned to benefit from multiple tailwinds in several key industries.

Valuation

Let me start by saying that valuation has always been an "issue" for some investors when it comes to Accenture's stock. However, these same investors have also missed out on a lot of upside because they were not willing to see the company's real growth potential. Today is no different - ACN shares are currently richly valued.

Data by YCharts

And according to Morningstar, Accenture's stock is trading well-above its fair value of $220/share.

Source: Morningstar

While ACN shares are definitely not cheap at today's price, let's also remember that Accenture is a shareholder-friendly company that operates in several high-growth industries. There is a reason why Accenture is widely viewed as the go-to service provider in almost every category of digital transformation. I believe that the company's growth prospects are not fully baked into the stock price, if you are willing (and able) to look out two-to-three years.

Risks

Accenture is highly levered to the digital space, so any major disruption to its talent pool or product offerings would significantly impact the company's business prospects.

Additionally, reputation risk is an important consideration because Accenture is the consultant in several major 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 2021 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 continue to improve and I do not see a reason for the company's prospects to change anytime soon. As such, investors with a time horizon longer than two-to-three years should consider any significant pullbacks as buying opportunities.

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.