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Accenture Stock Soared Today: Is It a Buy?

By Rich Smith – Dec 16, 2021 at 3:42PM

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Accenture's business is out of this world -- but so is the stock's valuation.

Consulting company Accenture (ACN 0.12%) saw its stock lift as much as 10% on a wave of enthusiastic buying earlier today. As we approach the final hour of trading, Accenture stock has given back some of those gains. But it's still up about 6.4% as of 2:55 p.m. ET and valued at $263 billion in total.

But is that too much to pay for Accenture?

The year 2022 in golden numbers with a green arrow pointing up and perpendicular to the numbers.

Image source: Getty Images.

To recap the results, Accenture reported earning $2.78 per share on $15 billion in revenue for its fiscal first quarter 2022. This brings total revenue for the past 12 months to $53.7 billion (valuing the stock at 4.9 times current year sales) and total earnings to $6.2 billion (valuing the stock at 42.2 times earnings). Free cash flow year to date is a bit higher -- $7.3 billion -- resulting in a price-to-free-cash-flow ratio of 36.

Any way you look at it, the conclusion is the same: This is one very pricey stock.

Granted, investors today don't seem to be looking at it that way, and I get where they're coming from. Accenture just posted 27% year-over-year sales growth for its first fiscal quarter, and bookings were up 30%, foreshadowing perhaps even stronger sales gains to come. Pro forma profits were up 28% year over year, and even profits when calculated according to generally accepted accounting principles (GAAP) grew a very respectable 20%.

Long term, however, analysts who follow Accenture stock see this year's profits growth as an aberration. They project a long-term earnings growth rate of less than 11%, according to data from S&P Global Market Intelligence.

Viewed from that long-term perspective, therefore, what we've got here in Accenture is a stock selling for a price/earnings-to-growth (PEG) ratio of nearly 4.0 (hint: Value investors try to stick to investing in stocks selling for a PEG ratio of less than 1.0) and so trading for about four times what a value investor like me would call a "bargain."

By that yardstick, I've got to conclude: Accenture's business had a great quarter, but Accenture stock simply costs too much.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns and recommends Accenture. The Motley Fool has a disclosure policy.

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