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Accenture plc (NYSE:ACN) is one of the world's leading consulting firms with strong financial performance over the past decade. On the other hand, revenue per employee has decreased over the last decade, reflecting e.gIn my opinion, this suggests that it will be much more difficult to fuel further growth. The company's business is also cyclical, which does not bode well for potential investors in today's challenging environment. Furthermore, my valuation analysis suggests that the share price has little room for upside in the near term.
Accenture is a global management consulting, technology services and outsourcing company headquartered in Dublin. The two main business areas are consulting and outsourcing.
The corporate year ends on August 31 of each calendar year. The Company's reporting segments are represented by geographic regions, with North America accounting for nearly halfof the company's turnover.
Accenture has delivered solid financial performance over the past decade, with gross and operating margins very resilient. Free cash flow margin [FCF] net of stock-based compensation [SBC], while relatively flat, generally increased.
"With sales doubling over the decade, why haven't margins increased?" may be a very valid question. The reason is quite simple if we dig a little deeper. On the other hand, despite the steady growth over the past decade, I would like to point out that the "sales per employee" metric has declined significantly over the course of the decade. This could be an indication that the company is not effective in managing growth.
The company pays dividends to shareholders, although the expected dividend yield of 1.5% does not look attractive, especially in the current environment of high interest rates and high inflation. In addition to dividends, Accenture returns money to shareholders through share buybacks. Over the past decade, the company has returned more than $28 billion to shareholders through share buybacks. This would be impossible if the company's balance sheet was not strong. The company has a solid cash position with strong cash ratios and almost no debt to total assets.
The company missed consensus earnings estimates in the most recent quarter, results announcedMarch 23. Despite the current challenging macroeconomic environment, the company has seen revenue growth both year-over-year and sequentially.
Revenue increased 9% in local currency or 5% in US dollars. All geographic markets saw growth in local currency, with growth markets outpacing North America and Europe.
The management is quite optimistic about the future prospects. For fiscal 3Q13, Accenture forecast revenue of $16.1 billion to $16.7 billion, up 3% to 7% year-over-year in local currency. Management cut its guidance for FY23 revenue growth to 8% to 10% in local currency from 8% to 11%. The current environment is challenging and bodes well for the company remaining on a modest growth trajectory. However, the company's most important markets are North America and Europeindustrialized countriesNowadays there is a high probability that they will go into recession.
Accenture pays dividends to shareholders, so I can use discounted dividend (DDM) and discounted cash flow (DCF) models for the valuation. As the discount rate, I use the WACC provided byvalueinvesting.comand round it to 9%.
I haveconsensus dividend estimates,and for DDM, I use FY2024 guidance of $4.68 per share. The three-year CAGR of dividend growth looks reasonable in my opinion at 7.3%Looking for Alpha QuantDividend Growth Metrics.
Based on the above assumptions, the DDM formula gives me a fair value of about $275, which is about 5% below the current share price, suggesting a slight overvaluation.
Now let me check the DDM calculations using the DCF approach. For sales growth over the next decade, I mix cunreasonable estimatesfor years to fiscal 2027 and my estimate of a 5% revenue CAGR for years beyond fiscal 2027. For FCF Margin, I use the latest available full-year FCF Margin excluding SBC, which is 9.83% and expect 25% unit increase per year.
When I include all the assumptions in the DCF model, I get a fair value for the company of about $195 billion, which is about 5% above its current market cap. Unlike the DDM, the DCF approach suggests that the stock is slightly undervalued.
Let me also examine the multiples for additional evidence. According to Seeking Alpha Quantrating points, Accenture has the lowest possible "F" grade. However, this comes at a significant premium to the industry median. But here I would argue that Accenture is a uniquely profitable company in its niche, so I think the premium is fair. Therefore, I compare ACN's current valuation ratios to 5-year averages, which would be more appropriate.
As you can see in the right-most column in the table above, current multiples are mostly below the 5-year moving average, indicating undervaluation. On the other hand, the deviations are usually single digits. I consider these differences to be insignificant.
Overall, I think the current share price is in the fair value range, more towards the higher end. I believe there is little upside from current levels in the near term.
Risks to consider
Besides the obvious circularity, Accenture, as a consulting firm, faces many risks. In consulting business, employees are the most important asset. Therefore, it is vital to manage the effectiveness and utilization of each individual employee. Management must be able to anticipate staffing needs to maximize shareholder value. As we saw in the economics section above, income per worker has fallen significantly over the past decade. I see the omission of the key "sales per employee" number as a risk and a warning sign for prospective investors.
Another risk inherent in a consulting firm like Accenture is that the results are unclear. There may be disputes and even lawsuits with customers as there have beenbetween Accenture and Hertz. Such differences are usually insignificant in terms of windfall costs, but can damage reputation, which is critical to consulting activities.
Another risk that Accenture faces as a consultancy is the relatively low barriers to entry. The company's competitors are strong and experienced like Cognizant (CTSH) and IBM (IBM) in the consultation. In the second line of services, outsourcing, the company faces stiff competition from India-based companies such as Infosys (INFY).
Overall, I give ACN a neutral rating. The stock is currently fairly valued with almost no upside, and the dividend yield doesn't look attractive in the current high-yield environment. Investors should also be wary of the decline in revenue per employee, which is critical given the nature of Accenture's business.
This article was written by
I am a highly experienced Chief Financial Officer (CFO) with an extensive background in the petroleum and real estate industries. With over a decade of financial experience, I have led numerous complex due diligence and M&A transactions both domestically and internationally. In recent years I have developed a keen interest in equity research and analysis of publicly traded companies. This interest led me to provide equity research services for a Dubai-based family office with over $20 million in assets under management (AUM). My expertise in finance allows me to provide valuable insight and recommendations to clients looking to make informed investment decisions. I pride myself on my ability to analyze financial reports, assess market trends and identify key growth drivers across industries. Keeping up to date with the latest developments and trends in the equity research industry is very important to me and I am always looking to expand my skills and knowledge through ongoing education and training.
Analyst Disclosure: We have no position in shares, options or similar derivatives in any of the listed companies and do not intend to take any position within the next 72 hours. This article was written by myself and is my own opinion. I receive no compensation for this (other than Searching Alpha). I am not affiliated with any company whose stock is mentioned in this article.
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