Accenture Stock: Overpriced in Today’s Value-Oriented Market (NYSE: ACN)

Accenture Building in Mississauga, Ontario, Canada

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Company Profile

Accenture (New York Stock Exchange:Acetonitrile) is a global professional services and technology company specializing in IT and consulting services.Accenture is Born as a Derivative From Arthur Andersen, the former Big Five audit firm.Since then, Accenture has gone from strength to strength grow exponentially and become a behemoth of the company, Over 695,000 employees.

Accenture is a truly global business, categorizing its services Divided into 3 geographic areas: North America, Europe and Growth Markets (Asia, Latin America, Africa and ME).

To sustain growth, Accenture seeks regular acquisitions.they have Make 110 deals Since 2019. Therefore, when evaluating this business, we must keep in mind that it is constantly changing and accelerating its strategy through inorganic growth.

Like other markets, Accenture’s stock has struggled in recent months. The stock is down 26% year-to-date compared to the S&P 500, which is down just 12.57%.

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data from YCharts

Many see Accenture as overvalued in late 2021, with the market pricing in further aggressive growth and margin expansion. With the stock re-rating, we believe now is a good time to re-evaluate Accenture and its business landscape to assess its attractiveness.

industry analysis

Accenture operates in a number of different industries and products, but it is an expert in IT and technology consulting. When we look at the market, moderate growth is expected. Gartner predicts 7.9% and 8.8% Growth in spending on IT services in 2022 and 2023, respectively. Importantly, Gartner sees this trend rising over time. They argue that the speed of technological change will mean greater reliance on consultants relative to in-house business resources.

More broadly, we see a similar trend when we look at technology consulting. Grand View Research The compound annual growth rate is expected to be 12%. This will be driven by management’s desire to further digitize the business.

https://www.grandviewresearch.com/industry-analysis/software-consulting-market

US Software Consulting Market (Grand View Research)

While these numbers are incredibly difficult to predict, the point is that the number of services expected to grow varies. Businesses are investing in: cloud computing, enterprise software, data analytics, intelligent automation, advanced software services, and more. All of these are services provided by Accenture. With the implementation of such services, cybersecurity has become more important than ever, and Accenture just happens to provide one.

What we’re trying to say is that Accenture is a one-stop shop for IT/tech consulting services. The global importance of these services will only grow further, and many are arguably still in their infancy.

Accenture, however, faces stiff competition. Anyone who has worked in a consulting/senior finance role knows that the number of companies is huge. I don’t like site rankings, but Consultancy.uk generally has a good way to organize the data. The following is very compelling and very persuasive.

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Accenture ranking (Consultancy.uk)

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Accenture ranking (Consultancy.uk)

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Accenture ranking (Consultancy.uk)

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Accenture ranking (Consultancy.uk)

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Accenture ranking (Consultancy.uk)

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Accenture ranking (Consultancy.uk)

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Accenture ranking (Consultancy.uk)

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Accenture ranking (Consultancy.uk)

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Accenture ranking (Consultancy.uk)

So yes, Accenture does have competition, but they are at the top of the pack. This is their forte, and no company does it better. This means that Accenture has no problems growing in this area.

Macro analysis

Now everyone is very aware of the state of the economy.We have Inflation is rampant In much of the Western world, slowing growth and high wage inflation (and low unemployment). This leads to the question of whether we will see stagflation.

We believe that the impact on Accenture is twofold. First, wage inflation may be a real problem for Accenture. They have a huge workforce of 699,000, twice the size of a similarly sized professional services firm, PricewaterhouseCoopers, by revenue.Professional services firms are forced to offer pay raises as employees have been able to switch jobs for lucrative salaries, shaking up the industry ICAEW Recommendations Up to 25% increase. If inflation persists, employees are unlikely to absorb this without looking elsewhere. Given that Accenture’s biggest cost is salaries, this will have a clear financial impact.

Second, Accenture could be affected by the decline in growth. Additional IT spending can be considered a premium that companies may cut to maintain margins/profitability. If we look back in history, Accenture had low/negative growth in 2009, 2010, 2013 and 2020, with declining GDP growth in those years.That said, look at Accenture’s 2022 Q1 and Q2 figures, we believe they will achieve $5.5-$60 billion in revenue. This represents an incredible 10-20% revenue growth, suggesting that the economic slowdown hasn’t hit them yet.

As a result, we believe Accenture will be negatively impacted by economic conditions and only see slower growth and higher costs if growth continues to deteriorate. That said, at the moment, performance is very resilient and evidence of a healthy economy. If things stay the same, Accenture is likely to continue its growth trajectory.

finance

Accenture’s acquisition nature is reflected in its revenue growth over the past decade. Their revenue has grown at a compound annual growth rate of 8% since 2011, with even greater growth over the past few years. The reason for this is an increase in business spending on IT implementations.

Whether this will continue into the next decade is difficult to predict, and we believe that as companies continue to implement cloud/cybersecurity/data analytics, there will likely be low double-digit growth in the medium term before starting to taper off. This does assume that Accenture has not identified a new area of ​​diversification, which is certainly possible but cannot be quantified. It should be noted that we are more bullish than the analysts here, whose consensus numbers call for a 9% CAGR through 2026.

Accenture’s margins are fairly strong, with GPM at 32%, OPM at 15%, and NIM at 11.69%.

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Accenture Margin Development Over Time (TIKR Terminal)

Accenture suggested they could transform into a more software-dependent business. We’re not sure about the outlook for this scenario, and current margins don’t reflect that. That said, for the service business, those margins are high.they translate to FCF margin of 9.7%which gives businesses a war chest from which they can fund growth or buy back stock.

Thanks to this strong cash flow, Accenture’s balance sheet is very good. With total debt of $3.55 billion and cash of $5.47 billion, Accenture currently has a negative net debt balance. There is no liquidity or funding risk, especially if interest rates rise. Negative net debt is trending down due to larger deal sizes, but that’s not a problem at the moment.

Therefore, it can be said that Accenture is a financial giant. It has the cash flow generation of a value stock while growing at an above-average rate. Going forward, we believe this will continue, although it will certainly depend on management’s execution of M&A transactions.

M&A activity

Accenture’s growth was primarily driven by mergers and acquisitions. In the medium term, they have an inorganic growth rate of about 2%, the target inflation rate. This means that about 6% of the growth is attributable to their transactions.

While this has been quite successful so far, it adds a greater degree of complexity and risk. The 75% year-on-year growth depends on management’s ability to successfully target the business and integrate it into the wider group. Their track record to date has been excellent, mostly on smaller deals that are easier to consolidate.

The extra complexity is also a price to pay. Achieving growth is great, but it must be given in the context of the cost of getting it. Accenture rarely discloses deal sizes, but we can make educated calculations.Accenture is targeting $62.6 billion in revenue by 2022, and M&A spending was $4 billion.

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Accenture Q2 22 Conference Call (Accenture)

Assuming the 5% growth is inorganic, that gives us $606 million. This translates to 6.6 times revenue ($4 billion/$606 million). That’s certainly not cheap, especially if the growth analysts predict can’t be sustained. At these multiples, it will take Accenture a long time to get a return on its investment.

peer comparison

Accenture’s competition consists primarily of private companies, including the Big Four accounting firms, the Big Three consulting firms and many other well-known firms.

We have only included the competitors listed below because they are structured to benefit their shareholders.

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Accenture KPIs relative to peers (TIKR terminal/author’s own calculations)

What we observed might surprise some, but Accenture looks average. The business is more efficient, earns more per employee and has a higher return on equity. However, peers have higher operating margins, which translate into better FCF margins, and are expected to grow at a faster pace. This is partly due to the low-cost model adopted by some of these businesses, especially those located in India.

More of Accenture’s demand is due to the remarkable growth in recent years relative to its size and innovation model. Investors are banking on their acquisitions to generate greater growth in the future than they are now.

So the big question is how fast Accenture can actually grow over the next few years to offset inefficiencies in margins. Our belief is in the low double digits, which doesn’t seem to be enough to justify a 3x premium.

Valuation

So what multiples are fair for Accenture? In the current economic conditions, we think a range of 18x to 19x is appropriate. This is the average multiple Accenture trades between 2017 and 2022, a period in which growth returns to the high single digits.

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Accenture’s Average LTM EV/EBITDA Multiple (2017-2022) (TIKR Terminal)

Based on this, we arrive at a fair value of $280/sec.

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Accenture market-based valuation (TIKR terminal / author’s own calculation)

This suggests that Accenture is overvalued by about 8%. Furthermore, as the sensitivities below show, the move required for a full upside would be a massive multiple expansion.

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Sensitivity analysis of Accenture valuation (TIKR terminal/author’s own calculation)

For context, Accenture has only traded at >20x LTM EBITDA in its one and a half year history.

Additionally, to cross-check our valuations, we also calculated DCF valuations. Based on our assessment of the above businesses, we assume high single-digit, low double-digit growth in FCF.

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Accenture DCF valuation (author’s own calculation)

This puts our valuation at $290.81/sec, slightly above our market-based valuation, but again below the current share price.

Given the uncertainty of growing at this rate and current market conditions implying that a significant multiple expansion is unlikely, we believe Accenture’s current share price of $304 is slightly overvalued.

final thoughts

Accenture shows that growth through mergers and acquisitions is good for shareholders. Both earnings per share and share price have grown substantially over the past decade, thanks to management’s strategy. Accenture’s future looks good, but economic headwinds could delay that and lead to a period of low growth. The current share price has little upside for potential investors, even after a sharp correction. Our recommendation is to monitor this business over the coming year, and if the share price falls further or there is evidence that growth will hold, Accenture could be an attractive investment. We currently rate Accenture a Hold, believing the stock will trade sideways until economic conditions improve.