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Is Accenture Stock a Buy?

By Leo Sun - Jun 2, 2021 at 7:44AM

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The IT services giant is firing on all cylinders, but its stock is sitting at peak levels.

Accenture (ACN 0.96%), the IT services giant that serves more than three in four Fortune Global 500 companies, is often considered a mature tech stock that is owned for stability instead of growth.

However, Accenture stock rallied more than 400% over the past decade as the S&P 500 advanced about 200%. It has also outperformed the S&P 500 over the past 12 months. Let's see why Accenture has consistently stayed ahead of the market and if it can maintain that momentum.

An IT professional checks her tablet in a server room.

Image source: Getty Images.

A resilient and diversified business

Accenture provides strategy and consulting services, technology services, and outsourced business and security operations in over 120 countries.

It splits its business across five end markets: communications, media, and tech (20% of its revenue in the first half of fiscal 2021); financial services (20%); health and public services (19%); products (27%); and resources (14%). Here's how those five businesses fared over the past year.

Revenue Growth (YOY)

Q2 2020

Q3 2020

Q4 2020

Q1 2021

Q2 2021

Communications, media, and tech

5%

0%

0%

3%

9%

Financial services

3%

0%

0%

5%

10%

Health and public services

15%

12%

12%

11%

14%

Products

10%

(1%)

(6%)

(3%)

2%

Resources

5%

(3%)

(10%)

(5%)

(7%)

Total

8%

1%

(1%)

2%

5%

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

The pandemic disrupted all of Acenture's end markets except for healthcare providers and public services, which both needed to keep their systems running throughout the crisis. But most of its other markets recovered in the first half of 2021 as more businesses reopened. Many companies also cut costs by outsourcing their operations to Accenture or hired its IT specialists to connect their on-premise systems to cloud platforms like Amazon Web Services (AWS) and Microsoft Azure.

Accenture is expanding its higher-growth "strategic priorities" -- which include its cloud, interactive, Industry X (digital transformation), and security businesses -- to differentiate itself from other IT giants like IBM and to widen its moat against digital-first challengers like Globant.

The company generated 70% of its revenue from those newer businesses in 2020, up from 65% in 2019 and 60% in 2018. Accenture didn't disclose any exact revenue figures for the first half of 2021, but it said the cloud, Industry X, and security categories all generated double-digit revenue growth during the period as its interactive business posted single-digit gains.

For the full year, Accenture expects revenue to grow 6.5% to 8.5% in local currency terms, even after reimbursable travel costs reduced its revenue by about 2% in the first half of the year.

Stable operating margins and free-cash-flow growth

Accenture maintained stable operating margins throughout the pandemic, and its free cash flow (FCF) grew both sequentially and year over year last quarter.

Period

Q2 2020

Q3 2020

Q4 2020

Q1 2021

Q2 2021

Operating margin

13.4%

15.6%

14.3%

16.1%

13.7%

Free cash flow (billions)

$1.37

$2.59

$2.97

$1.51

$2.44

YOY = year over year. Data source: Accenture.

That growth was impressive, considering Accenture spent $1.1 billion on acquisitions in the first half of the year to expand its ecosystem. It plans to spend "at least" $2 billion on acquisitions for the full year.

Even though the company is investing in its future growth, Accenture still expects to post an operating margin of 15.0% to 15.1% for the full year, which would represent a 30 to 40 basis point increase from 2020.

That expansion, which it partly attributes to lower travel expenses throughout the pandemic, also includes the impact of one-time bonuses it recently paid out to its employees. In other words, it's returning some of its savings to its workforce while improving its margins.

Accenture also spent $3.1 billion of its free cash flow on share buybacks and dividends in the first half of 2021. Its forward dividend yield of 1.25% might seem modest, but it spent just 28% of its FCF on that payout year to date, which gives it plenty of room for future hikes.

But is Accenture's stock getting too expensive?

Accenture expects its adjusted earnings per share to grow 12% to 14% for the full year. That growth rate is impressive, but the bears will argue the stock is getting overheated at 30 times forward earnings. IBM, which plans to spin off its managed IT services segment later this year, trades at just 12 times forward earnings.

The recent rotation from growth to value stocks -- which is being fueled by inflation fears, rising bond yields, and a focus on reopening plays -- likely amplified Accenture's gains over the past year as a mature tech company that offers more safety than speculative growth stocks.

This trend should lift Accenture stock higher near term, but those gains could take a breather as the stock sets fresh all-time highs (and matching valuation multiples). Investors can still accumulate shares of Accenture today, but they should temper their expectations for the rest of the year.

 

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, Globant, and Microsoft. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Accenture plc Stock Quote
Accenture plc
ACN
$317.45 (0.96%) $3.03
Microsoft Corporation Stock Quote
Microsoft Corporation
MSFT
$289.49 (0.86%) $2.47
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$141.40 (0.54%) $0.76
International Business Machines Corporation Stock Quote
International Business Machines Corporation
IBM
$133.05 (0.39%) $0.51
Globant Stock Quote
Globant
GLOB
$228.16 (1.28%) $2.89

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