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Accenture Stock Upgraded: What You Need to Know

By Rich Smith - Feb 5, 2018 at 10:49AM

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If you thought cloud computing was popular already -- just wait. The floodgates may really be about to open.

Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...

In a big move, investment bank Morgan Stanley downgraded the entire technology sector of the stock market to "equal-weight," while upgrading utilities to overweight. Morgan Stanley thinks utilities stocks have been unfairly punished by investors seeking income from other sources, reports StreetInsider.com (requires subscription) today, while tech "needs to rest" after enjoying a strong run-up in 2017.

And yet, despite an overall negative view of valuations in the tech sector, there is one tech stock that Morgan Stanley still likes: Accenture (ACN 4.74%).

Graphic showing computers attached to a cloud by lines

Image source: Getty Images.

Upgrading Accenture

Arguably one of the biggest names in IT consulting, Accenture won an endorsement from Morgan Stanley this morning, which argues "we are in the early stages of a secular shift toward Digital and Cloud adoption" globally -- and Accenture will facilitate it.

In addition to upgrading Accenture stock to overweight (in contrast to the rest of the tech sector, which got downgraded), Morgan Stanley is upping its price target on Accenture stock to $180 a share -- enough to provide a 15% profit to investors who buy today.

Why Morgan Stanley's got its head in the cloud

Morgan Stanley's buy thesis goes like this: "Historically, 20% adoption rates have signaled critical mass for technologies" such as cloud computing. After surveying a series of chief information officers, Morgan Stanley says that these CIOs "see cloud adoption more than doubling from 21% this year to 44% in 2021" -- meaning that no matter how big you thought cloud computing was already, 2018 should be the year it really takes off. 

Already, "Digital/Cloud projects are growing in size and scope," the CIOs tell Morgan Stanley. And "consulting firms and vendors" agree: "IT Services spending is picking up."

After crunching the numbers, Morgan Stanley projects a likely scenario of revenue "CAGR of 6% and EPS CAGR of 15% for our top picks over the next three years" -- with an outside chance of revenue growing 7% and earnings growing 18% annually over the same period.

Why this is good news for Accenture in particular

Accenture has made a "big bet on cloud computing, data security, and digital services," says my Foolish colleague Anders Bylund in a recent article. What's more, that bet is paying off, with "New" services like these accounting for 55% of Accenture's business in fiscal Q1 2018 -- and digital services sales tripling in size over the past four years.

Backing up Morgan Stanley's forecast, Accenture CFO David Rowland told investors last month that in "every industry, every geographic market, you see a level of rotation to The New." In fact, from Accenture's perspective, even Morgan Stanley's forecast may be conservative. Rowland said he was seeing interest in cloud computing, digital services, and so on in the range of "50% or higher" among Accenture clients.

The most important thing: Is now the time to buy Accenture?

This all sounds like good news for Accenture's business. But is Morgan Stanley right that now's the time to buy Accenture? Well, maybe not right now -- but soon.

Crunching the numbers myself, I see cash-rich Accenture stock trading for an enterprise value of roughly $93 billion (slightly cheaper than its market capitalization of $96.8 billion). Free cash flow is running at about $4.3 billion over the past 12 reported months, resulting in an EV/FCF ratio of 21.6 on Accenture stock.

That's pricey at analysts' consensus 10% projected profits growth rate for Accenture (according to data from S&P Global Market Intelligence). But at Morgan Stanley's 15% projected earnings growth rate -- or its 18% projection in a best-case scenario -- Accenture stock could start to look cheap if the stock market pullback that began late last week gains any more steam.

My advice: It's not time to buy Accenture just yet, but it's not too terribly far away from a price at which it might become a very good buy indeed.

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