Current Price: $267 Price Target: $295
Position size: 4.2% Performance since inception (3/11): +61%
Key Takeaways:
- They beat estimates and issued strong guidance. Revenue (+8%) ahead of high end of guidance range and highest street estimate. Upped full year revenue growth guidance to +6.5% to +8.5%, from previous guidance of +4% to +6%.
- Broad based improvement in demand – digital transformation is long-term secular growth driver to their business.
- Strong bookings and they continue to take significant market share, signifying solid business fundamentals. Bookings were up 13%.
- CEO Julie Sweet said…“For digital leaders, we see them no longer strictly competing for market share, but to build their vision of the future faster than the competition. And for digital laggards, they are determined to not simply catch up, but to leapfrog. While COVID has accelerated the demand, the reality is that the extent of transformation ahead is enormous. The move from approximately 20% to 80% in the cloud alone is a huge undertaking and it is just the start, as companies will then continue to invest to grow and innovate on their new cloud foundations.”
Additional highlights:
- Revenue $12.09 billion, +8% YoY, estimate $11.84 billion. Included 2pt reduction from reimbursable travel costs which are a pass through. Adjusted EPS of $2.03 (+10% YoY) vs. consensus $1.90, driven by 30bps of op margin expansion.
- Consulting revenues were $6.4B, up 4%, which includes a 3pt headwind from lower travel reimbursement.
- Outsourcing revenues were $5.6B, up 14% YoY
- Geographic breakdown: “growth markets” were up 6%, Japan was strongest, up double-digits. Europe was up 3% (Italy & UK were strongest), North America was up 7%.
- Strong bookings of $16B, up 13% YoY – 18 clients had bookings >$100 million. Overall book-to-bill of 1.3. Consulting book-to-bill of 1.2 and outsourcing book-to-bill of 1.4.
- Hardest hit end markets are showing improvement – they saw broad-based improvement across industries and geographic markets
- Similar to last quarter, ~50% of revenues came from 7 industries that were less impacted from the pandemic that, in aggregate, accelerated from HSD to low-double-digits growth.
- ~20% of revenue from clients in highly impacted industries – declined mid-single-digits, but seeing continued improvement this includes travel, retail, energy, aerospace & defense and industrials.
- This underscores the benefit of diversified industry end markets.
- Digital transformation imperative is long-term secular growth driver to their business. Before Covid there was already exponential technology change taking place with every business becoming a digital business. Mgmt. thought it would take a decade, now they think it is more like five years. “We are rapidly moving to a complete re-platforming of global business… it is hugely significant.” Accenture has been positioning themselves to be a leader in digital capabilities since 2014, which is why they are the leader, continue taking share and are well positioned in the future. Accenture’s unique positioning of trusted partner w/ leading edge technology expertise (they have their own network of R&D labs) combined with strategy and consulting practitioners that bring deep industry expertise are key to this. No competitor has their scale, breadth of services and cross-industry insights, which gives them an advantage in serving “compressed transformations.” “Our clients know that through our investments and focus on innovation, we will help future-proof them.”
- Accenture shines from an ESG perspective. They are a real leader in addressing how they create value for all of their stakeholders (employees, customers, vendors, shareholders) – it’s a constant theme on their calls, particularly w/ respect to their employees which is important as the “social” factor for them is very material b/c their industry is a “people business” w/ ~537K employees across the globe. For instance, they had a special employee bonus paid this quarter to employees below MD level, they’ve been heavily investing in upskilling their employees and they are now ~45% women; on track for their 2025 goal of a 50-50 gender balance. They also recently started their “360 degree value initiative” – aimed at helping their clients achieve responsible business goals – they say their clients are increasingly focused on sustainability, inclusion and diversity (rise of ESG is a catalyst to this) and that they are in a unique position to help companies w/ this.
- Capital allocation: they now expect to return at least $5.8 billion in cash to shareholders through dividends and share repurchases, compared with previous guidance of $5.3 billion. Dividend up 10% YoY. They’ve made investments of $1.1B in acquisitions (19 transactions) in the first half of the year and they expect to invest at least $2B in acquisitions this fiscal year.
- Valuation:
- The stock is undervalued trading at a >4% forward yield. They have an easily covered 1.3% dividend and no net debt.
- Multiple underpinned by ACN being a best-in-class company with stable growth that’s buffered by geographic and end market diversity and long-standing client relationships (95 of their top 100 clients have been with them for >10 years).
- They have $8.7B in cash on their balance sheet. The only debt they have on their balance sheet are capitalized leases, which were added last fiscal year due to an accounting change. Substantially all of their lease obligations are for office real estate.
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109
$ACN.US
[tag ACN]
[category equity research]