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The market as a whole is enjoying a bull market move, with the S&P 500 generating a total return of over 25% over the past year, and there are still several names that have underperformed.
One of these names is Professional services company Accenture plc (New York Stock Exchange:ACN), which is down roughly 18% year-to-date. Recent quarterly results left the market wanting, but there’s still a lot to like about the stock over the long term, including its past track record, generative AI business, and valuation.
This article will take a deeper dive into the stock to see why I think Accenture could be an excellent investment.
Earnings results showed areas of weakness
Accenture announced its fiscal 2024 second-quarter earnings results on March 22, 2024. While the results were last released three months ago, I think they can be useful to study the report for distinction. Trends in business.
For the quarter, revenue fell slightly year over year to $15.8 billion while falling short of estimates by a modest $40 million. Despite this slight decline, adjusted EPS of $2.77 compared favorably to $2.39 a year earlier and was 0.11 cent above expectations.
In terms of geographic market sales, North America sales were steady at $7.4 billion, while the EMEA region decreased by 2%. Growth markets, which account for $2.8 billion in sales, rose 6%.
In terms of sales by customer type, health and public services grew 10% to $3.3 billion, resources improved 4% to $2.2 billion, and products were stable at $4.8 billion. Communications, media and technology fell 75% to $2.7 billion and financial services fell 6% to $2.8 billion.
Management also provided advance guidance that disappointed investors. Revenue growth is now expected to range from 1% to 3%, up from 2% to 5% previously. Adjusted EPS is expected to be in the range of $11.97 to $12.20 compared to $11.97 to $12.32 previously.
Takeaways from the mixed earnings results
Looking at the geographic type and customer type, we can see that the results have been very mixed for the company. This trend has continued since the first quarter of the fiscal year, with Accenture getting good numbers from health, public services and growth markets and double-digit declines in communications, media and technology.
For the most recent quarter, consulting revenue totaled just over $8 billion, representing a 3% decline from the prior year. New bookings fell 2% to $21.6 billion, although the booking-to-bill ratio was 1.4 during this period.
While forward business was disappointing this quarter, year-to-date new bookings reached a record $40 billion. Looking beyond just near-term results, we see that Accenture continues to provide the products and services that customers are looking for, given the company’s ability to generate new bookings.
In addition, Accenture performed well last year. The company’s fiscal 2023 showed strong growth, with revenue rising 8% and adjusted earnings per share improving 9%. In the fourth quarter of fiscal 2023, the company saw growth in every region and territory outside of telecommunications, media and technology.
For comparison purposes, last year’s growth is roughly in line with the company’s long-term performance. The company’s compound annual growth rate over the past decade was 7.2% for revenue and 9.9% for adjusted earnings per share. Working at a high level has long been an Accenture trademark.
Analysts expect modest growth over the next few years, as demand among customer segments is expected to remain mixed.
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The company’s EPS guidance for this year is consistent with analyst estimates for the current fiscal year, but a stronger growth rate is expected over the next two fiscal years.
A return to growth is possible after what is expected to be an extraordinary level of growth in fiscal 2024. First, the company has been very active in the acquisition space, making a large number of acquisitions over the past few years. Accenture has acquired more than 140 companies over the past four fiscal years, as it continues to grow its core business.
One of its most recent acquisitions is the company’s purchase of Parisonate early last month. This acquisition will boost Accenture’s AI generation business, which has been thriving. Accenture secured $600 million in new bookings during the second quarter, which comes on the heels of $500 million in new bookings in the prior period.
The company had just $300 million in new bookings for AI creation throughout fiscal 2023, so this business is expanding at a high rate. AI should serve as an additional catalyst for the company, as Accenture plans to invest a total of $3 billion in its AI services in order to meet the needs of its clients. The company also stated that it has plans to have an AI workforce of nearly 80,000 by fiscal year 2026, which would be double what it currently employs. Artificial intelligence will be a big part of Accenture’s future business.
Valuation and profit analysis
The upside of a lower share price is that the valuation could be more attractive. With the stock closing Friday at $289, Accenture is trading at 23.9 times the $12.09 midpoint of the company’s revised guidance.
While this is still a premium valuation on the face of it, it is lower than the multiple the market has recently assigned to the stock. In fact, the company’s shares are trading at a 16% discount to the five-year average price-to-earnings ratio of 28. Accenture’s price-to-earnings ratio is also in line with the average stock in its sector as well. .
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Given the company’s long-term earnings growth rate, acquisition strategy, and the importance of AI to future business, I believe Accenture should trade within a price-to-earnings ratio of 26 to 28 times earnings estimates.
Using the guidance midpoint for fiscal 2024, the stock’s target price range is $314 to $339, which could result in a return of 8.7% to 17.3% from today’s price.
This doesn’t include Accenture’s dividend either, which the company has increased for 13 straight years. The stock’s 1.8% return isn’t the most generous return, but it is among the highest the stock has given in more than five years.
The low return is not due to a lack of trying on Accenture’s part. Dividends have increased at roughly the same rate as earnings per share since 2014 at 9.2% per year.
Dividends are also likely to continue to grow, as the expected payout ratio for this fiscal year is just 43% which is very close to the 10-year average payout ratio of 40%. The free cash flow payout ratio shows that dividends are safer, with Accenture having a three-year average payout ratio of just 29%. This leaves plenty of room for continued earnings growth.
Including dividends, investors could see total returns in at least double digits from Accenture’s current stock price.
Investment thesis risks
As with any investment, there are risks involved with owning shares in Accenture.
Even after the sell-off, shares are still trading at premium multiples. The multiple has been underwritten by the company’s long-term earnings growth rate, but if that continues to slow, the market will likely revalue the stock and cause the stock to decline further.
Second, Accenture’s acquisition spree was largely successful as it added the company to its business, but buying the wrong competitor at the wrong price can be viewed as a negative by investors.
Finally, while Accenture plans to be aggressive in its investment in generative AI, it may lag behind competitors, which could reduce the amount the market is willing to pay for the stock.
Final thoughts
Accenture has not been a great investment over the past year, but I think this opens the door for an opportunistic investor to take advantage of the declining stock price and valuation.
The company has a lot going for it, including a strong year-to-date book-to-bill ratio and a thriving AI business.
Even a small expansion of the price-to-earnings ratio to the lower end of my valuation range coupled with a modest dividend yield could reward shareholders with a double-digit total return. Therefore, I think Accenture is worth buying today.
