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Is Accenture Stock a Buy?

By Leo Sun - Aug 28, 2020 at 7:00AM

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The IT and consulting services giant is still firing on all cylinders.

Accenture (ACN -0.65%), which provides information technology (IT) and consulting services to a wide range of industries, has fared better than many industry peers over the past five years. Its stock has advanced over 150% in that time as it's acquired dozens of smaller companies, pivoted away from slower-growth markets, and expanded its reach across the higher-growth digital, cloud, and security markets.

Accenture's stock dipped briefly in March during the COVID-19 crash, but it's now trading near its all-time highs again. Let's take a closer look at this IT services giant and see if its stock still has room to run.

An IT professional checks a tablet.

Image source: Getty Images.

Separating the old from the new

Accenture generated 55% of its revenue from technology services last year. Another 32% came from its strategy and consulting services, and the remaining 14% came from its operations business, which helps companies optimize their business operations.

It serves five end markets: product makers (28% of its revenue last year), communications, media, and technology companies (20%), financial services (20%), health and public services (17%), and natural and chemical resources (16%). All five markets generated positive sales growth last year, led by an 18% year-over-year jump in the resources business.

Accenture's sprawling business includes a lot of moving parts, but its main strategy is to pivot away from slower-growth markets and toward the "new" digital, cloud, and security markets. Revenue from those new businesses grew 20% in constant currency terms last year and accounted for approximately 65% of its revenue -- up from just 40% in 2016.

The growth of those newer businesses, along with a steady stream of acquisitions and disciplined cost-cutting measures, enabled Accenture to generate robust revenue and earnings growth over the past five years:

ACN Revenue (TTM) Chart

Source: YCharts

Last year, its revenue rose 5% (8.5% in constant currency terms) as its adjusted EPS grew 9%. In the first three quarters of fiscal 2020, its revenue grew another 4% (6% in constant currency terms) as its adjusted earnings rose 5%. For the full year, Accenture expects its revenue to rise 3.5% to 4.5% in constant currency terms, for its operating margin to expand, and for its adjusted earnings to rise 3% to 5%.

By comparison, IBM's (IBM 0.79%) global business services revenue stayed nearly flat last year and its global technology services revenue dropped 6%. IBM is also attempting to pivot its aging IT and consulting services toward higher-growth markets, but its transformation has been far less successful than Accenture's.

How did Accenture weather the COVID-19 crisis?

The COVID-19 crisis didn't significantly impact Accenture for two reasons. First, companies still needed to maintain their IT infrastructure throughout the pandemic, and accelerating demand from the health and public services sector easily offset softer demand from its other end markets.

Second, Accenture CEO Julie Sweet noted during last quarter's conference call that the crisis "immediately widened the gap" between the technological leaders and laggards. Sweet noted Accenture was seeing the "leaders doubling down on their investments, while the laggards recognize the speed to accelerate the pace of their transformation." Sweet also declared that the company was "seeing even more significant growth post-COVID across industries" in transitions to cloud infrastructure platforms like Amazon Web Services and Microsoft Azure.

Those improving market conditions explain why Accenture offered such a clear outlook for the rest of the year when several of its peers, including IBM, declined to provide any forward guidance.

A rosy outlook with a premium valuation

Wall Street expects Accenture's revenue and earnings to grow 5% and 6%, respectively, next year. However, the stock isn't cheap at nearly 30 times forward earnings, and its forward yield of 1.4% won't attract too many dividend investors. By comparison, IBM trades at just 11 times forward earnings and pays a forward yield of 5.2%.

Accenture's stock should generate stable gains for the foreseeable future since it's well insulated from the macro headwinds and it benefits from the secular growth of the cloud market, but its valuation could limit its upside potential. Accenture's stock remains a safe investment even as it hovers near its historic highs, but investors shouldn't expect it to blast off anytime soon.

 

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Amazon. The Motley Fool owns shares of and recommends Accenture, Amazon, and Microsoft and recommends the following options: long January 2021 $85 calls on Microsoft, short January 2021 $115 calls on Microsoft, short January 2022 $1940 calls on Amazon, and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

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Accenture plc Stock Quote
Accenture plc
ACN
$314.42 (-0.65%) $-2.06
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International Business Machines Corporation
IBM
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