Accenture plc (NYSE:ACN) has steady revenue growth and operating margins going into the year due to its strong capabilities and deep relationships with its customers. Potential investors would have to pay forward 16.1x EV/EBITDA for a company with not much upside compared to its peers in terms of consensus financial performance. Despite some risks navigating through the current uncertainty, Accenture generated $5.4B of free cash flow last year to cushion the company against potential shocks.
Accenture is growing steadily through its strong value proposition for customers
Accenture provides consulting and outsourcing services for companies. Its consulting projects, which make up 56% of revenues, cover areas like strategy and broad fields including blockchain, technology and digital transformation. The remaining revenue consists of outsourcing, which includes services such as accounting, procurement services, and application services. Accenture has been able to use its expertise to address a wide array of enterprise issues. Clients rely on Accenture to navigate an increasingly complex and disruptive environment. As such, Accenture’s customers consist of more than 75% of Fortune Global 500 and 91 of the top 100. With this value proposition, Accenture’s revenue has grown from $21.5B in 2010 to $44.6B in 2019 at an annual rate of 7.5%.
Accenture also has partnerships with leading cloud platforms, which enable the company to help other companies looking to shift their business to the cloud:
Intelligent Platform Services benefits from our strong partnerships with leading next-generation, cloud-enabled platforms— including SAP, Microsoft, Oracle, Salesforce and Workday. We are also a global leader in cloud on the major platforms including Amazon Web Services, Microsoft Azure and Google Cloud Platform. We leverage all of these relationships, together with our digital and industry expertise, to help clients transform their entire enterprises.
(Source: Annual Report)
Many companies are still in the early stages of embarking on their digital transformation journey. The digital transformation market is also expected to grow at roughly 22% to reach $3.2T by 2025. At its current revenues of $44.6B, Accenture’s penetration is still low and this creates a long runway for Accenture to grow.
Accenture has strong relationships with its customers
The company has been investing heavily in innovation over the years. Accenture’s customers rely on the company to come up with fresh ideas for their business and strong execution. Accenture has to be the leader in innovation to continue to provide value for its clients. With more than $800M invested in R&D, Accenture now has over 7,400 patents in its global portfolio. The company also invested $1.2B across 33 acquisitions to acquire critical skills and capabilities in strategic, high-growth areas of the market.
All these investments have strengthened Accenture’s reputation as a reliable provider of industry expertise and experience. Out of 100 of Accenture’s largest clients, 95 have been with the company for 10 years or more. This is due to the customised solutions provided by Accenture. For example, Accenture’s partnerships with key cloud providers like Microsoft (NASDAQ:MSFT) and salesforce (NYSE:CRM) allows the company to build capabilities on top of the platforms to customize its solution for customers. This makes it difficult for companies to switch consultants once they integrate their operations into Accenture’s solution due to the high level of customization.
If Accenture’s services do not add value to customers and switching is easy, we should see a gradual decline in operating margin due to price competition. However, Accenture’s margins have remained relatively steady between 13% and 15% in the past 10 years.
Accenture’s expertise and strong relationships have a positive impact on its long-term outlook
We expect that Accenture will grow its revenues by roughly 7% in the next 5 years. This is driven by its intelligent platform services that will cater to customers looking to embark on their digital transformation journey. Accenture’s continued innovation should also allow the company to retain most of its largest customers.
Accenture’s strong industry relationships should allow the company to retain its pricing power. The company should also be able to derive some efficiencies from continued investments in areas like automation. Hence, we expect some expansion in Accenture’s operating margins to roughly 15% over the next 5 years.
Accenture’s business depends on retaining demand for the company’s services and solutions. With the current uncertainty surrounding the economy, some companies might reduce spending on Accenture’s services to conserve cash flow. This could have some short-term impact on Accenture’s results going forward.
Accenture’s success is also highly dependent on its ability to innovate rapidly and provide capabilities to its customers. This includes retaining talented employees with the knowledge and skills to provide value for its customers. Any slowdown in innovation and inability to retain its talented workforce could result in a decline in Accenture’s capabilities.
Accenture has a strong liquidity position
In order to navigate the uncertain landscape and continue to invest in its capabilities, Accenture should have a strong financial position in place. That appears to be the case as Accenture has $5.4B of cash and $20M of debt. The company also generated $5.4B of free cash flow last fiscal year. Accenture’s strong cash flow generation ability puts the company in a strong position to manage its risks.
Based on relative valuation, Accenture appears to be overvalued based on consensus EV/Revenue, EV/EBITDA and multiples. The company’s consensus EV/Revenue of 2.9x is higher than the median figure of 2.6x. Accenture’s EV/EBITDA of 16.1x is also higher than the median of 15.9x. Its P/E ratio of 26.5x is also higher than the median of 21.3x.
However, Accenture has slightly worse consensus estimates than its peers. Its consensus EBITDA margin of 17.7% is worse than the median of 24%. The bright spot is that its consensus revenue growth of 2.7% is higher than the average of 2%. Hence, potential investors in Accenture do not appear to have a large margin of safety by investing in the company now.
(Source: Atom Finance)
Accenture has to ensure that it continues to invest heavily in improving its capabilities and maintaining its strong relationships with its top customers. This will help the company maintain steady revenue growth and operating margins in the future. Accenture also requires strong management execution to navigate through a more uncertain landscape and retain its talented workforce despite a potential drop in cash flow.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.