4 Reasons You Should Watch Accenture in 2018

2017 was a solid year for Accenture (ACN +1.85%), which saw its stock rally over 30% on three straight quarters of accelerating sales growth. Last quarter, the IT and consulting services giant's revenue rose 12% annually to $9.52 billion, topping estimates by $260 million. On the bottom line, its earnings rose 13% to $1.79 per share, which also beat expectations by $0.12.

Accenture also provided rosy guidance for the full year. It now expects its revenue to rise 6%-8% annually, versus its prior forecast for 5%-8% growth. It sees its earnings hitting $6.48-$6.66 per share (representing 10%-13% growth), compared to its prior forecast of $6.36-$6.60 per share.

Image source: Getty Images.

These figures make Accenture look healthier than older rivals like IBM (IBM +1.98%), which is expected to report a 2% sales decline with just 2% earnings growth this year.

However, investors might be wary of buying Accenture after its big run, and note that its trailing P/E of 27 is higher than the industry average of 21 for IT services providers. Yet I think that Accenture could still be a good investment for 2018, for four simple reasons.

1. It's firing on all cylinders

Accenture offers its IT and consulting services to a wide range of industries, all of which posted healthy demand last quarter.

Its Communications, Media, and Technology revenues grew 10% annually to $1.87 billion (on a local currency basis), marking the unit's strongest growth rate in seven quarters. The unit posted double-digit sales growth in software platforms, with strong demand in North America and Growth Markets (Asia, Latin America, Africa, the Middle East, and Turkey), as well as a "return to strong growth" in Europe.

Image source: Getty Images.

Its Financial Services revenue rose 11% to $2.06 billion, supported by strong growth in the banking, capital, and insurance markets. Health & Public Service revenues grew 8% to $1.63 billion, marking a "significant improvement over growth rates in fiscal 2017." Both segments posted double-digit sales growth in Europe and its Growth Markets.

Its Products revenue rose 10% to $2.58 billion, marking its 10th straight quarter of double-digit growth. The business posted double-digit sales growth in the consumer goods, retail, and travel services industries, enhanced by robust demand in Europe and its Growth Markets. Lastly, its Resources revenue jumped 10% to $1.33 billion, riding high on the momentum it gained in the second half of fiscal 2017.

2. Strong bookings growth

Accenture is also reporting strong bookings at its Consulting business, which is offsetting the softer growth of its Outsourcing business.

Source: Accenture quarterly reports.

Accenture is also pivoting both businesses toward the higher-growth digital, cloud, and security services, which accounted for over 60% of its new bookings last quarter. This strategic shift insulates Accenture from the so-called "death of outsourcing" in lower-demand IT fields at the hands of mobile and cloud-based services.

This arguably makes Accenture more nimble than older IT services companies like IBM, which reported respective revenue declines of 2% and 3% at its Global Business Services and Technology Services & Cloud Platforms units last quarter.

3. Rock-solid margins

Margins across the IT and consulting services industry declined over the past few years due to market saturation. Accenture isn't immune to those headwinds, but its margins stabilized over the past year. Last quarter, it reported a gross margin of 32.1% and an operating margin of 15.6%. Both figures remained unchanged from the prior year quarter.

By comparison, IBM's Global Business Services' gross margin dropped 150 basis points annually to 27.3% last quarter. The gross margin of its Technology Services & Cloud Platforms also fell 90 basis points to 41.1%.

4. A decent dividend with room for growth

Accenture's forward yield of 1.7% is much lower than IBM's 3.9% yield. But Accenture spent just 46% of its earnings and 38% of its free cash flow on that dividend over the past 12 months -- indicating that it has plenty of room for future hikes.

Accenture pays a semi-annual dividend, and its second payment every year is usually higher than the first. In 2017, it paid a $1.21 per share dividend for the first half of the year, followed by a $1.33 dividend for the second half.

The key takeaways

The IT services industry might seem like a slow-growth one, but Accenture is consistently outmaneuvering older rivals like IBM while pivoting its business toward higher-growth markets to offset softer demand for its legacy services.

Therefore, I believe that Accenture deserves to trade at a premium to its peers, and that it should head even higher throughout 2018.