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This Tech Company’s Success Is Practically Inevitable

By Motley Fool Staff – Jul 7, 2016 at 12:55PM

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The Motley Fool's John Rotonti explains one way to invest in the tech space that doesn't depend on guessing the next must-have gadget.

No matter who places where in the tech race, consulting company Accenture (ACN -1.96%) is positioned to win big from the industry's headwinds.

In this clip from Industry Focus: Tech, analysts Dylan Lewis and John Rotonti explain what Accenture does, and why it's such an exciting company. Also, they discuss Brexit's effect on the stock's price, and how investors might want to take note. 

A transcript follows the video.

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This podcast was recorded on July 1, 2016.

Dylan Lewis: Switching over to another tech player, John. You said you also wanted to talk about Accenture. This is a company that's probably most easily understood as a consulting company, but they have their hands in a whole bunch of different things. You want to talk about their business a little bit? 
 
John Rotonti: Yeah, thanks, I'd love to! What I like about Accenture is it's a way to invest in some of the most exciting technologies in the world without having to pick who's going to be the winner, or what's going to be the next big thing. There's handfuls of cloud companies out there, handfuls of cyber security companies out there. For me, it's hard to pick which one is going to be the winner. But with Accenture, they help their clients implement cloud computing or cyber security. So they're going to benefit from the industry tailwinds, regardless of who turns out to be the winner. 
 
You mentioned it's a technology consulting and outsourcing company. It's got a strong balance sheet, again, with $3.5 billion more in cash than it has in debt. It has got strong free cash flows. It generates 50% returns on equity -- there's that ROE number again. And then, the predictability and consistency that we talked about earlier. It's increased revenues in 16 out of the past 18 years. The revenue growth is not always really strong, but it's consistent. I think, in the past three years, if you look at 2013-[2015], revenue grew at about a 4% CAGR [compound annual growth rate], which is not bad in a slow-growth world. But, it's increased constant currency revenue growth by double digits now for seven consecutive quarters, and it's guiding for full-year revenue growth this year of at least 9.5%. So, it's coming off of 4% revenue growth rate, and that's ramping up to double digits. 
 
What's happening is Accenture is perfectly positioned to take advantage of the new industrial revolution that we're seeing with cloud, cyber, and social and mobile. In fact, those businesses now account for 40% of Accenture's total revenue, and they're growing at a 30% clip. 
 
Lewis: Just to clarify, when you say CAGR, for listeners who might not know, that's compound annual growth rate. 
 
Rotonti: Yes, basically average growth rate annualized out over a period of time, compound annual growth rate, exactly right.  
 
You have got this company with a huge competitive advantage, great management, rock-solid balance sheet, and it just has a ton of business momentum right now benefiting from this new industrial revolution. And then to top it off, it's the 38th most valuable brand in the world according to BrandZ. The CEO has 93% approval ratings on Glassdoor.com. 94% of the Fortune 100 are its clients, and its client retention ratios are off the charts, so of its top 100 clients, 97 have been clients for the past 10 years. 14 consecutive years as one of Fortune's Most Admired Companies, seven consecutive years as one of Fortune's 100 Best Companies to Work For, nine consecutive years as Ethisphere's World's Most Ethical Company. So, you're getting all of that at what I think is a fair price, and I'm happy to be an owner right now. 
 
Lewis: And currently, they're at a P/E [price-to-earnings ratio] of just under 20. They're an international company, they're headquartered in Ireland. They were a company that was hit particularly hard by the Brexit news because of that. They've rebounded a bit. They're still down about 5%, but it seemed like an opportunity for people that might be interested in them. If you're interested in following up with Accenture, John, are there any important metrics to look at? I know their business is a little bit different than what we might typically talk about on the tech show. 
 
Rotonti: There's a unique metric in the consulting industry that Accenture reports every quarter when it releases its earnings. It's called the book-to-bill ratio. It's basically an indicator of future demand, so it measures new orders relative to actual business performed and billed. So, a ratio of 1X or higher is generally an indicator of strong future demand.  
 
Beyond that, I look at returns on capital, free cash flow relative to both its reported net income and its sales, and I look at its growth rates. Like you said, it's domiciled in Europe, it got hit a bit with the Brexit news. But that's maybe an opportunity for long-term owners to either add to their position, or for people who are interested to maybe take a first look. 

Dylan Lewis has no position in any stocks mentioned. John Rotonti owns shares of Accenture. The Motley Fool recommends Accenture. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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