Is Accenture Stock a Buy?

Accenture (ACN 1.88%), one of the largest IT services companies in the world, posted its fourth-quarter earnings on Sept. 23. Its revenue climbed 24% year over year to $13.4 billion, which met analysts' expectations, while its adjusted EPS rose 29% to $2.20 and beat estimates by a penny.

Accenture's growth rates are impressive, but its stock has already rallied more than 40% over the past 12 months and is hovering near an all-time high. Is Accenture's stock still worth buying at these levels?

Image source: Getty Images.

A diversified and resilient business

Accenture provides IT services to five main markets: communications, media, and tech (20% of its fiscal 2021 revenue); financial services (20%); health and public services (19%); products (28%); and resources (14%).

The pandemic disrupted the growth of all of those markets, except for health and public services, last year. However, those headwinds have waned and Accenture's growth has accelerated again throughout 2021.

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

Accenture expects its revenue to rise 18% to 22% year over year in the first quarter of fiscal 2022, compared to analysts' expectations for just 15% growth.

For the full year, Accenture expects its revenue to increase 12% to 15%, compared to its 14% growth in 2021 and Wall Street's expectations for 10% growth. That upbeat outlook indicates that demand for Accenture's services -- especially within its "strategic priorities" of cloud, interactive, industry X (digital transformation), and security businesses -- will remain elevated.

Its "strategic priority" businesses are growing rapidly

Accenture is growing faster than other IT services giants like IBM (IBM 2.23%) because it's aggressively expanding those "strategic priorities". Here's how rapidly those four businesses are growing.

Data source: Accenture.

Accenture's cloud business is booming as more companies hire its IT professionals to tether their networks to public or hybrid cloud services. Its interactive business, which helps companies upgrade their digital marketing initiatives, is also in growth mode as more companies refine their online experiences for consumers.

Its Industry X business, which upgrades factories and plants with software and connected devices, is profiting from the secular expansion of the industrial Internet of Things (IoT) market. Lastly, its security business is thriving as more companies upgrade their cybersecurity services to deal with a growing number of data breaches and cyberattacks.

By comparison, IBM's Global Business Services and Global Technology Services divisions, which compete against Accenture, grew their combined revenue just 2% year over year in the first half of 2021.

Stable operating margins and strong free cash flow growth

Accenture's massive scale, which includes over half a million employees in over 200 cities in more than 50 countries, enables it to maintain stable operating margins and increase it free cash flow (FCF) even as it gobbles up smaller IT companies. Its EPS growth, buoyed by its tight financial discipline and consistent buybacks, has also accelerated over the past year.

Data source: Accenture.

Accenture expects its adjusted EPS to increase 13% to 16% in fiscal 2022, which also exceeds Wall Street's expectations for 12% growth.

Accenture spent over 100% of its FCF on buybacks and dividends in 2021, and it plans to continue returning its cash to shareholders in 2022. It just raised its quarterly dividend from $0.88 to $0.97 per share, which gives it a forward yield of 1.1%. Accenture also approved another $3 billion in buybacks.

But is Accenture's stock getting too expensive?

Accenture's business is firing on all cylinders, but its stock might seem expensive at 34 times forward earnings. However, Accenture's rock-solid growth rates, growing exposure to secular tailwinds across the cloud, security, and digital transformation markets, and shareholder-friendly practices all justify that slight premium. Therefore, I believe Accenture remains a solid long-term investment, even though it's trading near its all-time highs in this frothy market.