Accenture (ACN -0.32%) posted its latest earnings report on Sept. 28. For the fourth quarter of fiscal 2023, which ended on Aug. 31, the IT service provider's revenue rose 4% year over year (in both local currency and USD terms) to $16 billion but missed analysts' estimates by $80 million. Its adjusted EPS grew 14% to $2.71 and cleared the consensus forecast by eight cents.
Accenture's stock price dropped 4% after it released that mixed report, but it's still up 13% for the year. Is this blue-chip tech stock still worth buying in this choppy market?
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Another quarter of slowing growth
Accenture provides IT services to five end markets: communications, media, and tech (18% of its fiscal 2023 revenue), financial services (19%), health and public services (20%), products (30%), and resources (14%). All of those sectors faced tough macro headwinds over the past year, but the health and public services segment suffered the mildest slowdown because most of those clients provide essential services.
|
YOY Revenue Growth by Segment |
Q4 2022 |
Q1 2023 |
Q2 2023 |
Q3 2023 |
Q4 2023 |
|---|---|---|---|---|---|
|
Communications, Media, and Tech |
23% |
11% |
0% |
(8%) |
12% |
|
Financial Services |
22% |
13% |
10% |
5% |
3% |
|
Health and Public Services |
19% |
15% |
15% |
14% |
13% |
|
Products |
25% |
15% |
9% |
6% |
5% |
|
Resources |
21% |
21% |
16% |
12% |
10% |
|
Total |
22% |
15% |
9% |
5% |
4% |
Data source: Accenture. YOY = Year-over-year. Local currency terms.
Accenture doesn't expect that slowdown to end anytime soon. It expects its revenue to stay roughly flat year over year (between a 2% decline and 2% growth) in local currency terms in the first quarter.
For the full year, it expects its revenue to rise 2%-5% in local currency terms, compared to its 8% growth on the same basis in fiscal 2023. But that full-year forecast includes about two percentage points of inorganic growth from its recent acquisitions, so it actually only expects to squeeze out 0%-3% growth on an organic basis.
During the conference call, CEO Julie Sweet said Accenture was navigating a macro environment that was "tougher than we anticipated" with "lower discretionary spend, slower decision-making, and in particular for us, a significant impact from the challenges the comm, media, and tech industries have faced." CFO KC McClure also said the company was "not assuming" there would be "an improvement in the discretionary spend environment or the macro" in fiscal 2024.
Focusing on the factors it can control
As Accenture's revenue growth cools off, it's cutting costs to stabilize its margins. It already laid off 19,000 employees (2.5% of its workforce) earlier this year, automated another 13,000 jobs, then reskilled and redeployed those employees into other positions.
That's why its adjusted operating margin expanded 20 basis points year over year to 14.9% in the fourth quarter and rose 20 basis points to 15.4% for the full year. For fiscal 2024, it expects its adjusted operating margin to expand to 15.5%-15.7% as its adjusted EPS rises 3%-6%. However, that would also represent a slowdown from its 9% EPS growth in fiscal 2023 and barely meet analysts' expectations for 6% growth.
Yet Accenture still generated $9 billion in free cash flow (FCF) in fiscal 2023, and it spent $4.3 billion of that total on buybacks and $2.8 billion on dividends. It also just raised its quarterly dividend by 15% to $1.29 per share, lifting its forward yield of 1.7%, and boosted its current buyback authorization by $4 billion to $6.5 billion. It expects to generate $8.7 billion to $9.3 billion in FCF in fiscal 2024, and it expects to spend "at least" $7.7 billion of that total on buybacks and dividends.
But its valuations could limit its upside potential
Accenture's growth should accelerate again once the macro environment improves, but its valuations could limit its near-term gains until that happens. At $300 a share, it already trades at 25 times the midpoint of its adjusted EPS forecast for fiscal 2024.
Microsoft, which is expected to grow its earnings by 12% in its current fiscal year, trades at 28 times forward earnings. IBM, which is expected to generate 5% earnings growth this year, trades at 14 times forward earnings. Therefore, Accenture's stock isn't too expensive -- but it also isn't cheap relative to its growth rates and industry peers. Its low dividend yield also won't attract any serious investors or limit its declines during a market downturn.
Accenture might still be a decent long-term investment, but it simply isn't a compelling buy right now. It certainly isn't a growth stock, but it also isn't cheap enough to be considered a value stock. As a result, Accenture won't be worth buying until its growth accelerates again or a market wipeout makes its stock too cheap to ignore.
