Is Accenture Stock a Buy?

Last September, I said Accenture (ACN -1.45%) was still a solid investment even after the IT services giant turned in a weak fiscal 2020 fourth-quarter earnings report. The stock price has risen roughly 15% since then as its fiscal 2021 first-quarter earnings beat in December brought back some bulls, but does it still have room to run?

Understanding Accenture's business

Accenture provides strategy and consulting services, technology services, and outsourced business and security operations via cloud-based software. It offices are located in more than 200 cities across 50 countries, and its 514,000 employees serve clients in over 120 countries.

Image source: Getty Images.

Its customer base includes 91 of the Fortune 100 and over three-quarters of the Fortune 500. Those customers are spread out across five main industries: communications, media, and tech (19% of its revenue in the first quarter); financial services (19%); health and public services (19%); products (27%); and resources (14%). Here's how those businesses fared over the past year:

Data source: Accenture. YOY = Year over year. Constant currency terms.

The COVID-19 pandemic disrupted all of its main industries, except for health and public services, in the second half of fiscal 2020. However, its growth turned positive again in the first quarter of fiscal 2021 as businesses reopened and focused on upgrading their infrastructure (especially cloud, mobile, and security services) and outsourcing their operations to cut costs.

Accenture's revenue from its "new" businesses -- which include its digital, cloud, and security divisions -- accounted for 70% of its revenue in fiscal 2020, up from 65% in 2019 and 60% in 2018. That shift could help it keep pace with slimmer and nimbler IT rivals like Globant (GLOB -2.27%), which mainly focuses on upgrading websites and mobile apps for companies.

Expanding margins and strong cash flows

Accenture's services help companies streamline their operations and cut costs, but it also excels at streamlining its own business to maintain stable operating margins with strong cash flows:

Data source: Accenture. YOY = Year over year.

Accenture often returns more than 100% of its free cash flow to investors through dividends and buybacks. It reduced its number of Class A shares by 18% between 2015 and 2020, and raised its dividend annually for 11 straight years. It currently pays a forward dividend yield of 1.5%.

Accenture's IT services competitor IBM (IBM -8.25%) pays a much higher forward yield of 5.5%, but Accenture is growing at a much healthier rate than Big Blue, which is still struggling to generate positive sales growth.

Rock-solid guidance for the rest of the year

Accenture expects its revenue to rise 4%-6% in constant currency terms for the full year. It expects its operating margin to expand 10-30 basis points, and for its adjusted EPS to increase 8%-11%.

Based on those estimates and a price of $250 per share, Accenture's stock trades at about 30 times this year's earnings. That P/E ratio is a bit high relative to its growth, and makes it pricier than IBM, SAP, and other companies in the crowded IT services sector.

Is Accenture still worth buying?

Accenture is still a safe long-term investment, but investors shouldn't expect big market-beating gains this year. Its higher valuation and lower yield will likely keep value-seeking income investors away, while more aggressive investors might prefer high-growth IT stocks like Globant instead.

Therefore, I think investors could start positions in Accenture up here, but they might want to wait for a market pullback -- which could reset its valuations to more attractive levels -- to add more shares.