Accenture: A Promising Growth Profile

Accenture (ACN) is a company that I first wrote about on Seeking Alpha in April 2017 (see here) when shares of this global technology consulting company were under significant market pressure due to the company’s “disappointing” Q2 2017 results. Since the previous article was published, ACN shares have greatly outperformed the broader market.

(Source: Nasdaq)

The outperformance has been impressive since that point in time, but I believe that ACN shares still have room to run because this company has proved again and again that it has great long-term business prospects in place.

(Image Source)

More Of The Same, Another Great Quarter

On September 28, 2017, Accenture reported impressive top- and bottom-line growth for the final quarter of its fiscal 2017. Moreover, the company’s quarterly results were good from top to bottom, as two of the three geographic regions had double-digit net revenue growth and all five operating groups experience top-line growth.

(Source: Q4 2017 Infographic)

The company’s net revenue growth was aided by the fact that the digital, cloud, and security services (dubbed “The New”) accounted for over 50% of revenue for the quarter –up from 40% a year ago and 30% from two years ago. To this point, management has long described The New as the key growth driver for Accenture and it appears that everything is already beginning to fall into place.

(Source: Q4 2017 Infographic)

As shown, this category grew by ~30% in local currency in fiscal 2017 and management does not anticipate for the growth to slow anytime soon. For example, management highlighted the opportunities that Accenture has within the digital, cloud and security spaces during the Q4 2017 conference call and, more importantly, they guided for “strong double-digit growth in The New in fiscal ’18”.

From a bottom-line perspective, Accenture finished fiscal 2017 with a strong quarter as Q4 adjusted EPS was up 13% YoY (to $ 1.48) and operating margins expanded by 10 bps (to 14.2%). For full-year 2017, Accenture’s adjusted EPS came in at $ 5.91 (11% YoY increase) on operating margins of 14.8% (20 bps increase).

This was a great fiscal year for Accenture but, looking forward, management still anticipates for this company to have a strong fiscal 2018. It helps management’s case that the numbers prove that Accenture has a promising growth profile, as new bookings came in at $ 10.1B for Q4 2017 and $ 38.4B (6% YoY increase) for full-year fiscal 2017. During the conference call, management providing the following full-year fiscal 2018 outlook:

  • net revenue growth to be in the range of 5% to 8% in local currency.
  • operating margin to be in the range of 14.9% to 15.1%, which would represent margin expansion of 10 to 30 bps.
  • earnings per share to be in the range of $ 6.36 to $ 6.60, which would represent YoY growth of 8% to 12%.
  • operating cash flow to be in the range of $ 5B to $ 5.3B, with free cash flow to be in the range of $ 4.4B to $ 4.7B.

There was a lot to like about Accenture’s results for Q4 and full-year fiscal 2017 but I believe that investors should begin to bake in expectations for this company to report strong top- and bottom-line growth for at least the next few years.

A Promising Growth Profile

Not only has Accenture been busy in the M&A space (spent $ 1.7B in fiscal 2017 on small tuck-in acquisitions) but the company has also been making important partnership deals with major players in several key industries. A few recent examples are:

  • A deal with Apple (AAPL) to create an enterprise-focused iOS apps.
  • A deal with Veeva Systems (NYSE:VEEV), a life sciences company, to provide cloud-based services to promote greater customer engagement.
  • A deal with Freeport-McMoRan (NYSE:FCX) to provide services to drive digital transformation of mining operations.

Additionally, as an long-term investor in Accenture, it is hard not to get too excited about the Internet of Things (or IoT) predictions because this company is viewed as the go-to service provider in this industry that is expected to experience significant growth over the next few decades.

(Source: Gartner)

As shown, Gartner predicts that almost all new tech products (95%) will contain some type of IoT component by 2020. Furthermore, to put a dollar figure to the predictions, McKinsey & Company expects for IoT technology services to have a CAGR of 17% over the next five years and to reach $ 143B in spending by 2021.

(Source: McKinsey & Company)

Any way you slice it, IoT is going to play a critical role in the global economy for years to come. Therefore, investors in Accenture should be encouraged that the company reported strong results over the past 12 months, but, in my opinion, the company’s growth prospects are what should make you the most excited about an investment in this industry leader.

Bottom Line

Accenture reported impressive operating results for Q4 and full-year fiscal 2017 but I believe that the focus should be on the company’s promising growth profile. Given this, the strong fiscal 2018 guidance should be viewed as only the starting point because this company has several long-term catalysts in place that should help propel the stock price higher over the next three-to-five years. Yes, Accenture appears fairly valued based on current earnings estimates (i.e. P/E ratio of ~20), but, in my opinion, the investment opportunity looks more attractive the further you look out.

Accenture is well-positioned to capitalize on the digitization megatrend, which has the potential to be a multi-decade growth opportunity for this company. Given this, investors with a long-term prospective should consider adding ACN shares at the current level.

Author’s Note: ACN is a small (but growing) position in my R.I.P. portfolio.

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Disclaimer: This article is not a recommendation to buy or sell any stock mentioned. These are only my personal opinions. Every investor must do his/her own due diligence before making any investment decision.

Disclosure: I am/we are long ACN, AAPL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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