Summary
- We maintain an overweight position on Accenture plc.
- The upside potential is driven by high industry growth fueled by: cloud, security, Internet of Things (IoT) and block-chain, which account for about 65% of the company's sales,.
- A leading presence and competitive edge with customer relationships and a diversified business mix, which has led to market share gain,.
- Strong free cash flow with no net debt provides great optionality to build (or buy) digital capabilities to drive future organic growth.
- Risks include a lower IT-services spending environment, lack of strategic M&A, and the ability to attract and retain talent.
Investment Thesis
We recommend a BUY rating for Accenture plc (NYSE: ACN). The stock represents good value with an estimated upside of 17%, trading at an EBITDA multiple of 13.15x.
The upside potential is driven by 1) high industry growth fueled by cloud, security, Internet of Things (IoT) and blockchain, which account for about 65% of the company’s sales 2) a leading presence and competitive edge with customer relationships and a diversified business mix 3) strong free cash flow with no net debt, which provides great optionality to build (or buy) digital capabilities to drive future organic growth. The company also has a solid tenure management team with a strong track record in reinventing and investing aggressively in emerging technologies and have outpaced its competitors. Downside risks are lower IT-services spending environment, lack of strategic M&A and the ability to attract and retain talent. Overall, Accenture has showcased consistent top-line and bottom-line growth, outperforming its peers in growth and industry presence
Q2 2020 Earnings Call and COVID-19 Impact
- On March 19, 2020 Accenture plc (ACN) surpassed the consensus estimate for earnings and revenues. Earnings of $1.91 has increased YoY by 10.4% as well as bottom line benefiting from higher revenues, operating results and non-operating income.
- ACN forecasts lower-than-expected quarterly revenue on coronavirus fears with potential project delays and slowing consumer spending.
- The company expects 2020 revenue growth between 3% to 6% from prior forecast of 6-8%.
- CEO Julie Sweet believes Accenture is positioned well due to a virtual team structure, a standing crisis management committee, virtual working expertise, staff retention and services relevance.
- Service relevance: 60% of the business revolves around deep client relationships with the world’s leading companies. ACN’s business model enables the company to help clients succeed in uncertain periods and position for the long-term.
Industry Drivers: Cloud, Cybersecurity and Analytics
The explosive growth for cloud-based applications have created a growth space for the IT-services industry. With salesforce.com (CRM) leading the implementations, the industry is experiencing a greater need to deploy other Software-as-a-Service (SAAS) products (ie. Workday and ServiceNow). And as part of the process, system integrators such as Accenture helps in shifting data from legacy applications to newer products.
Customers upgrading their older systems to the modernized IT-infrastructure have also created a greater demand for hybrid-cloud services, offered by IBM, Accenture, Tata Consultancy Services, Infosys, Cognizant and Capgemini. In addition, managed-cloud services have also been experiencing a larger demand as the IT-services companies help customers host their infrastructure on the public cloud, usually offered by Amazon.com, Microsoft and Google.
