Accenture (ACN) is a global management consulting, technology services and outsourcing company with approximately 275,000 people serving clients in more than 120 countries. As of the end of fiscal year 2013, the company had revenues just shy of $29 billion and a market capitalization that was roughly double that amount. Additionally, Accenture provides services to a wide spectrum of industries ranging from Automotive and Aerospace to Energy and Travel. Effectively, Accenture wants to deliver a high performance solution to whatever problem you have on hand.
Of course, that is not to say that the company is without risks. Like all equity issues, there is always a reason that potential investors have the opportunity to be compensated well beyond "safe" rates of return. For instance, some might point to the consulting and outsourcing segments as demonstrating worse than anticipated sales trends. Or foreign exchange headwinds could prove more complicated than originally anticipated. Demand patterns could require consistent changes to the company's strategy. The business could even be a victim of a slowing or evolving global economy. There's always a reason that a particular company might face challenges; in fact, within Accenture's most recent 10-K management lays out a total of 30 potential threats and risk factors.
However, with the above being stated, there does appear to be a variety of growth catalysts for the company. For example, Accenture works with 91 of the Fortune Global 100 and more than three quarters of the Fortune Global 500. Perhaps more impressively, of Accenture's top 100 clients based on revenue, 99 of them have been with the company for at least 5 years. Accenture has worked with 91 of those clients for at least 10 years. In other words, it appears that the Accenture business model is quite sticky. It's one thing to find and obtain clients, it's another thing entirely to maintain, strengthen and extend those relationships.
It follows that such a large company with a persistent business model might be hard to replicate. And this type of moat is precisely what we observe. Morningstar analyst Andrew Lange does a solid job of describing Accenture's advantages:
"We believe Accenture has a wide economic moat based upon customer switching costs and intangible assets. Deep and broad industry expertise, a global delivery network, and satisfied customer references have provided the company with a successful foundation in the highly competitive and fragmented IT services industry. Accenture's global nature sets the company apart from smaller rivals, and allows it to draw from a vast pool of specialist personnel and technology tools. We think such resources make Accenture an attractive partner for large enterprise clients. Notably, Accenture finished fiscal 2013 with roughly 130 diamond accounts (accounts over $100 million in annual revenue), which is an industry-leading figure and only replicable by the likes of IBM."
Clearly the company has a fundamental advantage over any would-be start-up competitors. In addition to this theoretical benefit, Accenture has also demonstrated that it can use this scale to deliver results. For instance, in the most recent earnings conference call Accenture indicated that they had new bookings of $33.3 billion, which was an all-time high amount and near the top of their previously guided range. With a profitable business, shareholder returns usually follow. Accenture CEO Pierre Nanterme described such a scenario in the latest earnings call:
"We generated free cash flow of $2.9 billion, slightly above our guided range, and we continue to have a very strong balance sheet, ending the year with a cash balance of $5.6 billion. We continue to return cash to shareholders with $3.7 billion in share repurchases and dividend payments during the year. And we just announced a semiannual cash dividend of $0.93 per share, which is a 15% increase over our prior dividend."
Surely investors are excited about this, much in the way that they would be excited about future increases. Accenture has been able to increase its dividend for 9 consecutive years at an annualized pace of over 20% a year. In viewing the current payout ratio below 40% with a reasonable 2.5% yield, future growth in line with earnings or slightly better appears reasonable.
Finally, those still doubting the potential growth story of Accenture will have to go through the likes of David Rowland, Accenture's CFO. As he described in the latest investor conference day:
"Let me start by saying that we are a growth-oriented company. And everything you heard today clearly illustrates that point. I can assure you that our management team focuses 24/7 on what we need to do to drive profitable growth. It's in our DNA and it's embedded in our culture."
With that, let's turn to the past operating history and possible future endeavors for an Accenture investor.
11 Years of Growth
Accenture has grown earnings (orange line) at a compound rate of 17.3% since 2003, resulting in a nearly 48 billion dollar market cap. In addition, Accenture's earnings have risen from $1.06 per share in 2003, to today's forecasted earnings per share of approximately $4.29 for 2013. Further, Accenture initiated a dividend (pink line) in 2005 and has been able to increase this payout at a robust pace. Note that Accenture did not cut its dividend in 2010, but rather switched to a semi-annual payout.
For a look at how the market has historically valued Accenture, see the relationship between the price (black line) and earnings of the company as seen on the Earnings and Price Correlated F.A.S.T. Graph below.
Here we see that Accenture's market price previously began to deviate from its justified earnings growth; starting to become undervalued during the most recent recession and coming back to fair value as of late. Today, Accenture appears to be fairly valued in relation to both its historical earnings and relative valuation.
In tandem with the strong earnings growth, Accenture shareholders have enjoyed a compound annual return of 15% which correlates somewhat closely with the 17.3% growth rate in earnings per share. A hypothetical $10,000 investment in Accenture on 12/31/2002 would have grown to a total value of $45,611.11, without reinvesting dividends. Said differently, Accenture shareholders have enjoyed total returns that were roughly 2 times the value that would have been achieved by investing in the S&P 500 over the same time period. It's also interesting to note that an investor would have received approximately 1.2 times the amount of dividend income as the index as well.
But of course - as the saying goes - past performance does not guarantee future results. Thus, while a strong operating history provides a fundamental platform for evaluating a company, it does not by itself indicate a buy or sell decision. Instead, an investor must have an understanding of the past while simultaneously thinking the investment through to its logical, if not understated, conclusion.
In the opening paragraphs a variety of potential catalysts, opportunities and risks were described. It follows that the probabilities of these outcomes should be the guide for one's investment focus. Yet it is still useful to determine whether or not your predictions seem reasonable.
Twenty-three leading analysts reporting to Standard & Poor's Capital IQ come to a consensus 5-year annual estimated return growth rate for Accenture of 12%. In addition, Accenture is currently trading at a P/E of 17.4, which is inside the "value corridor" (defined by the orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, Accenture's valuation would be $107.17 at the end of 2018, which would be a 9.8% annualized rate of return including dividends. A graphical representation of this calculation can be seen in the Estimated Earnings and Return Calculator below.
Now, it's paramount to remember that this is simply a calculator. Specifically, the estimated total return is a default based on the consensus of the analysts following the stock. The consensus includes the long-term growth rate along with specific earnings estimates for next two upcoming years. Further, the dividend payout ratio is presumed to stay the same and grow with earnings. Taken collectively, this graph provides a very strong baseline for how analysts are presently viewing this company. However, a F.A.S.T. Graphs' subscriber is also able to change these estimates to fit their own thesis or scenario analysis.
Since all investments potentially compete with all other investments, it is useful to compare investing in any prospective company to that of a comparable investment in low risk treasury bonds. Comparing an investment in Accenture to an equal investment in a 10-year treasury bond, illustrates that Accenture's expected earnings would be 3.9 times that of the 10-year T-Bond Interest. This comparison can be seen in the 10-year Earnings Yield Estimate table below.
Finally, it's important to underscore the idea that all companies derive their underlying value from the cash flows (earnings) that they are capable of generating for their owners. Therefore, it should be the expectation of a prudent investor that - in the long-run - the likely future earnings of a company justify the price you pay. Fundamentally, this means appropriately addressing these two questions: "in what should I invest?" and "at what time?" In viewing the past history and future prospects of Accenture we have learned that it appears to be a strong company with solid upcoming opportunities. However, as always, we recommend that the reader conduct his or her own thorough due diligence.
Disclosure: Long ACN, IBM at the time of writing.