The past three months have been brutal for stock investors, and the immediate future feels as uncertain as ever. So, how do we navigate these scary times? Every major stock market drawdown has a tendency of throwing the baby out with the bathwater -- along with the broader market, there are a few high-quality companies that get the short end of the stick. One such company that the investors may be currently missing out on is Accenture (NYSE: ACN). Here are three reasons why Accenture is likely to continue its market-beating performance going forward.
Stock may be down, but the demand is growing
Since coming public in July 2001, Accenture has emerged into a leading global professional services company. Accenture helps businesses develop strategies to grow revenue and operate more efficiently, and adopt modern innovations and technologies to gain an edge in today's increasingly digital and competitive world. Among other success stories:
- It helped Tim Hortons to improve customer experience, develop a customer loyalty program, and increase profitability with insights into customers' buying habits.
- It redesigned and automated auto loan processes for a global bank in its Latin American market, boosting auto loan sales by 50% and reducing costs.
- It is helping McCormick grow revenues and increase efficiencies by adoption of cloud technologies to overhaul its supply chain, logistics, finance, and plant maintenance functions.
Image source: Getty Images
According to CIO.com, the key pillars of digital transformation -- including adoption of modern technologies, improvement of cybersecurity practices, and automation of business processes -- are top imperatives for business leaders in 2022, and likely for years to come. Businesses are partnering with Accenture to attain those objectives. Gartner believes that the total addressable market for Enterprise IT Services, which is only a portion of Accenture's services, is estimated at over one trillion dollars. Even with its eye-popping 2021 revenue of $50.5 billion, Accenture has only about 5% of the share of this massive market, and a long runway in front of it.
Durable competitive advantages are leading to a strong industry position
Accenture's unparalleled breadth and depth of services, expertise across all company functions, and specialized skills in various industries make it very difficult for rivals to compete, especially on large lucrative enterprise-scale solutions. Plus, with its 674,000 employees based in 50 countries and serving clients in 120 countries, Accenture is a truly global company. Accenture's scale creates a major competitive advantage for the company.
Brandz, a brand review agency, valued Accenture's brand at $64 billion at the end of 2021, and ranks it 27th globally on the top 100 most valuable global brands list. This strong reputation enables the company to attract best-in-class talent. Top talent produces high value for its clients, who, in turn, continue to feed the company more work, creating a virtuous business cycle.
Even with a highly global workforce, Accenture has done an excellent job of creating a unified culture focused on creating value for its clients, and the employees seem to love the company. On Glassdoor.com, employees rate the company 4.1 stars, and 90% of employees approve of CEO Julie Sweet. The company also looks beyond its shareholders to focus on caring for its people, clients, partners, communities, and the environment.
With such strong advantages, more and more clients are partnering with Accenture. As of the end of fiscal 2021, Accenture was serving more than three-quarters of the Fortune Global 500 companies, and 98 of Accenture's top 100 clients have been with the company for more than 10 years. The company has grown its Diamond clients, its largest relationships, from 200 in fiscal 2019 to 216 in fiscal 2020 to 229 in fiscal 221.
Superior execution is driving profitable growth and extending lead
Accenture has ingrained in its strategy the discipline of studying future trends, and proactively investing in building capabilities ahead of the demand. The company's foresight in building skills in digital transformation over the past decade is accelerating its sales growth.
| Revenue Metrics | 2018 | 2019 | 2020 | 2021 | 2022 (est) |
|---|---|---|---|---|---|
| Revenue (billions) | $41.0 | $43.2 | $44.3 | $50.5 | - |
| Year-over-year growth | 13.57% | 5.36% | 2.54% | 14.00% | 19%-22% |
SOURCE: COMPANY EARNINGS RELEASES. 2022 GROWTH IS AN ESTIMATE BY THE COMPANY.
In addition to sales growth, Accenture has steadily improved its profits.
| Profitability Metrics | 2017 | 2018 | 2019 | 2020 | 2021 | Growth |
|---|---|---|---|---|---|---|
| Net income (billions) | $3.44 | $4.06 | $4.78 | $5.10 | $5.90 | 14.14% |
| Free cash flow (billions) | $4.45 | $5.40 | $6.02 | $7.61 | $8.40 | 17.21% |
SOURCE: COMPANY EARNINGS RELEASES. GROWTH: COMPOUNT ANNUAL GROWTH RATE.
Strong free cash flow is allowing Accenture to invest heavily in R&D -- in fiscal 2021, the company plowed a whopping $1.1 billion cash into innovation. The company has created a program called Industry X to invest in engineering, manufacturing, and supply chain expertise, which it believes to be the next digital transformation frontier. And Accenture is protecting its intellectual property with a massive portfolio of 8,200 approved and pending patents.
Finally, Accenture has a fortress of a balance sheet with over $6 billion in cash and short-term investments, and a nominal $55 million of long-term debt.
Nobody is perfect
Every business has risks, and Accenture is not an exception:
- Competition: IT consulting is a crowded industry with a number of small niche players as well as well-established competitors such as Deloitte and Infosys. Accenture will have to keep its rivals in check with flawless execution.
- Acquisitions and integration: Accenture has boosted its emphasis on acquisitions in the past 15 months or so, investing $1.17 billion and $1.5 billion toward that end in 2019 and 2020 respectively. Those sums represent less than 20% of its free cash flow, but the $4.2 billion the company spent buying other businesses in 2021 represented about 50% of its cash flow that year. It's since spent $1.7 billion on acquisitions in just the first quarter of fiscal 2022. Trying to absorb too many companies, too quickly, could jeopardize the company's culture and execution.
- Tick-up in attrition: About 14% of employees quit Accenture in 2021, a moderate rise from 12% in 2020. However, when looking closer, attrition in the recent three fiscal quarters was at 17%, 19%, and 17%. It may seem counterintuitive to see the attrition go up while employees rate the company so highly. Although it is tricky to point to specific reasons, the high demand for skilled professional services in the current market may be a contributing factor.
- Global instability: The horrible war between Russia and Ukraine creates a major risk, especially in Europe. Accenture has employees based in Europe, and the company earned about 34% of its revenue from Europe in its most recent quarter. Investors should be prepared for the consequences of the current situation.
A reliable addition to anchor the portfolio
With the current pullback of over 25%, shares are trading at a relatively lower price-to-earnings multiple of about 32. Secular tailwinds, durable competitive advantages, robust execution, and strong cash flows and balance sheet make Accenture a highly resilient business. Add to that the 1.2% annual dividend the company offers. For patient long-term investors, now may be a great time to add this high-quality business to the portfolio.
ACN PE Ratio data by YCharts
