Accenture's (ACN -1.04%) stock recently tumbled after its fourth-quarter numbers missed Wall Street's expectations.
The IT and consulting services company reported on Wednesday that fourth-quarter revenue fell 2% year-over-year (and declined 1% in constant currency terms) to $10.8 billion, missing estimates by nearly $97 million. Its adjusted earnings dipped 2% to $1.70 per share, missing expectations by two cents.
For the first quarter, Accenture expects a 2% year-over-year decline to 1% growth in revenue, which barely meets expectations for 1% growth. In constant currency terms, it expects a 3% decline to flat growth.
For the full year, it expects its revenue to rise 2%-5% in constant currency terms, compared to expectations for 5% growth. It expects its adjusted EPS to improve 4.6%-8.6%, well below expectations for 9.5% growth.
Image source: Getty Images.
Those numbers might seem disappointing, but most of Accenture's headwinds are temporary -- and its post-earnings drop could represent a long-term buying opportunity, for five simple reasons.
1. The healthcare unit remains resilient
Accenture generates its revenue from five main industries: communications, media, and tech (20% of its fourth-quarter revenue), financial services (19%), health and public services (19%), products (27%), and resources (14%).
Accenture started facing pandemic-induced declines in the second quarter, which started at the beginning of March. However, its health and public services segment continued generating double-digit revenue growth:
|
Revenue Growth (YOY) |
Q1 2020 |
Q2 2020 |
Q3 2020 |
Q4 2020 |
FY 2020 |
|---|---|---|---|---|---|
|
Communications, Media, and Tech |
7% |
5% |
0% |
0% |
3% |
|
Financial Services |
6% |
3% |
0% |
0% |
2% |
|
Health and Public Services |
13% |
15% |
12% |
12% |
13% |
|
Products |
12% |
10% |
(1%) |
(6%) |
3% |
|
Resources |
7% |
5% |
(3%) |
(10%) |
0% |
|
Total |
9% |
8% |
1% |
(1%) |
4% |
YOY = Year over year. Constant currency terms. Source: Accenture.
During the conference call, CEO Julie Sweet said the company netted "substantial new bookings in the health and public sector" as the COVID-19 crisis boosted demand for better contact tracing tools, cloud-based and remote collaboration services, supply chain upgrades, and tighter security features.
Accenture's forecast for fiscal 2021 suggests the healthcare market will remain resilient as the other industries gradually recover. In other words, Accenture will likely pass through a trough during the fourth and first quarters -- and its growth should stabilize throughout 2021.
2. Its "new" businesses are still growing
Accenture's core growth strategy is to expand its "new" businesses -- which include its cloud, digital, and security services -- to offset the slower growth of its older businesses.
Image source: Getty Images.
Accenture's "new" business revenue grew 10% in constant currency terms to $30 billion, or about 70% of its top line, in fiscal 2020. That's up from 65% in 2019 and about 40% back in 2016.
That expansion should keep Accenture ahead of slower rivals in the IT services space like IBM (IBM 1.05%), which posted flat growth in its global business services revenue and a 6% decline in its global technologies services revenue last year. IBM is also trying to expand newer businesses to offset the declines of its legacy businesses, but its turnaround has been less successful than Accenture's.
3. Its bookings are near record highs
Accenture's bookings rose 9% year-over-year in constant currency terms to $14 billion in the fourth quarter, which marked its second-highest quarterly bookings ever. It attributed most of that growth to robust demand for its cloud, digital, and security services. For the full year, Accenture's bookings grew 10% to $49.6 billion.
4. Its free cash flow hit a record high
Accenture's free cash flow (FCF) hit a record high of $3 billion in the fourth quarter, and its total cash balance grew $2 billion sequentially to $8.4 billion.
That healthy cash flow enabled Accenture to pay out $509 million in dividends and repurchase $590 million in shares throughout the quarter. For the full year, it generated $7.6 billion in FCF, and spent $2.0 billion of that total on dividends and $2.9 billion on buybacks.
Those figures leave Accenture plenty of room for higher dividends and bigger buybacks. That's why it just raised its quarterly dividend by 10% to $0.88 per share -- which equals a forward yield of 1.6% -- and approved a fresh $5 billion buyback. Its ongoing commitment to boosting shareholder value throughout the crisis is refreshing, especially as other companies cut their dividends and suspend their buybacks.
5. Expanding margins and a cooler valuation
Accenture's operating margin rose ten basis points year-over-year to 14.3% in the fourth quarter, and improved ten basis points to 14.7% for the full year. It expects that expansion to continue throughout fiscal 2021. It attributed its margin expansion to tighter cost controls throughout the crisis, including about 25,000 layoffs earlier this year, as well as lower travel and event expenses throughout the crisis.
When I discussed Accenture last month, I noted the stock wasn't cheap after more than doubling over the past five years. It still isn't a bargain at 27 times this year's earnings, but it's gotten cheaper after its post-earnings decline -- which could represent a good starting point for new investors.
