Creating Value Investing in Technology, Cloud, Data and AI with Accenture

Today we focus on the business of the Irish consulting company Accenture PLC. The company’s market cap is almost $200B (Mega cap), and its shares are trading on the New York Stock Exchange as ACN. After the publication of another quarterly report on March 21 we saw a dramatic drop of ACN stocks by 9%. Since the beginning of the year, Accenture stakeholders’ capitals have decreased by 10%,5 and the drawdown from the peak in March reached 19%.

«360 percentage Value» is the company’s slogan for its stakeholders. Today we want to figure out whether it is possible to take advantage of the current situation. We’ll dive deep into the company’s financials so you can see why Eyestock’s clients can feel confident about the clarity of their Accenture stock investment prospects. But we’ll start by understanding what exactly the company does.

What does Accenture do?

Accenture is a global company, one of the leaders in the global professional services and digital technologies market. The company’s clients have access to a wide range of services and solutions in the areas of strategy, consulting, digital services, technology and operational optimization. From developing a strategy to implementing specific marketing activities, from cloud services to custom outsourcing solutions, from product support to artificial intelligence, from researching trends in system implementation, from digital marketing to data security services — all this is about Accenture businesses.
The range of services provided is so wide that it is not for nothing that the company employs more than 740 thousand people, who generated $64.1B in revenue for fiscal 2023.

The company works with clients from such industries as media, financial services, healthcare and resources, where revenue is distributed evenly between them. But the main segment remains the «Products» operating direction, which includes industrials and companies known for producing and providing essential services. They account for $19.1B or almost a third of all goods sold. In terms of geography, the main market is North America with a 47% share of the revenue.

Why did ACN shares fall?

Julie Sweet, chair and CEO of Accenture, said, “In an uncertain macro environment, we remain
the trusted partner to our clients for reinvention with a record 39 clients with quarterly bookings
of over $100 million…». However, stocks lost significant value as sales and new orders fell. The company forecast revenue in the current quarter would be lower than expected and lowered its full-year forecast. Accenture said it expects revenue for the current quarter to range from $16.25 billion to $16.85 billion, below markets’ expectations. It forecast full-year sales growth of 1% to 3% despite its previous forecast of 2% to 5% growth.

Are ACN stocks now undervalued or overvalued?

This time, let’s start our proprietary analysis with valuation since we are talking about falling stock prices. On the one hand, the company may seem overvalued. The reaction of investors is understandable. The market is not stupid. Let’s operate with figures because they don’t lie. Accenture’s latest quarterly earnings per share were $2.66, compared to $2.42 for the quarter ended February 28, 2023. This means that the net income growth rate is 10%. As of April 16 ACN share price on the NYSE was $313.94 and with annual earnings per share of $11.02, this means a 28.5 price-to-earnings ratio. If we divide it by the growth rate, we get a value of 2.85. Great, we just calculated the PEG ratio (price/earnings to growth ratio). Companies with a value less than 1 are generally considered undervalued, but here we see a significant difference for the worse.

Do you know what comes to mind first? META stocks, oddly enough! We saw a similar situation at the end of 2021 when growth rates dropped and then became negative amid a paradigm shift and company name change. However, in our investment portfolio, we continued to hold the stock despite the poor PEG, first suffering a 65% drawdown and then marveling at a 5x gain. This is because we prefer relative historical valuation to using PEG to estimate value.

Let’s return to Accenture. As we have already said, the current net profit multiplier is 28.5. To figure out whether it’s high or low, we look for the median assessment over the last 5 years and find that the current EPS-adjusted price is lower than the average. This gives us reason to consider ACN shares to be undervalued right now, however, the most conservative investors can try to wait for the stock to reach around $260.

Is it worth investing in Accenture stocks?

To ensure that valuation does not turn out to be a waste of time, we must ensure that the company’s business performance is sound and that it actually generates value for its clients and cash flows for shareholders.

The company compensates for the margins that are not the highest in the IT industry with the absence of debt and excellent debt burden indicators. Accenture`s return on equity (ROE) remains strong at 29% — above our valuation benchmark of 20%. Although the downward dynamics of the last 5 years makes us closely monitor the company’s performance.
As for the stability or sustainability of business growth, we evaluate the growth rate and its deviation over different periods. We have already said that the current profit growth rate is 10%, and this is fully consistent with the 5-year average. The important thing is that during the same period, the volatility of this indicator was slightly higher, which gives another good point.

Opinion

Accenture is a fairly stable and reliable business, characterized by strong diversification of cash flows and the absence of debt obligations that negatively affect the company’s performance. The company is now at a stage in the cycle where there are threats of changes in market conditions that could change the balance of power, but we consider the current price falling as an opportunity to strengthen long-term portfolio with ACN stocks with awareness of a certain risk.

Option

The American Cognizant Technology Solutions Corp (Nasdaq Exchange: CTSH) is a similar company from the industry. Although its shares are trading even more profitably (14% below the average value), this investment is less attractive for 2 reasons.

First, Cognizant rating is worse than Accenture rating by as much as 19 points and is moderate at 86%.
Second, the average historical return of CTSH stocks over the last 5 years is negative (-0.6%) with fairly high volatility and a beta value of more than 1. So why invest in a more risky idea when there is a clear alternative?

Find out more figures about Accenture and Cognizant by going inside the company pages.