Current Price: $401 Price Target: $435 (increased from $355)
Position size: 5.25% Performance TTM: +70%
Key Takeaways:
- Strong results and issued very strong guidance. Revenue (+27%) beat and meaningfully increased full year revenue growth guidance to +19 to +22% (from +12-15% YoY). Saw continued op margin expansion (+20bps) despite higher attrition, investments in training and significantly reinvesting in the business.
- Broad based strength in demand – They saw double-digit growth across all markets, all industry groups and all services. Record bookings of $16.8B, +30% YoY. Overall book-to-bill of 1.1.
- Digital transformation is long-term secular growth driver to their business –
- They are a market leader uniquely positioned to benefit from secular growth driven by evolving technologies including cloud, analytics, security, blockchain, IoT and artificial intelligence. Accenture has an advantage w/ their unique positioning of trusted partner w/ leading edge technology expertise (they have >8K patents and their own network of R&D labs) combined with strategy and consulting practitioners that bring deep industry expertise. No competitor has their scale, breadth of services and cross-industry insights, which gives them an advantage in serving “compressed transformations.”
- Over 70% of their revenue is from digital, cloud and security. They say around 30%-ish of workloads have moved to the cloud
- “Our clients know that through our investments and focus on innovation, we will help future-proof them.” “We are rapidly moving to a complete re-platforming of global business… it is hugely significant.”
- Quote from the call on the metaverse: “while the metaverse has recently burst into the public eye, we’ve been an early innovator in applying the technology. In fact, we often innovate on cutting-edge technologies by deploying them at Accenture first. We are proud to have the largest enterprise metaverse through what we call the Nth Floor and are deploying over 60,000 virtual reality headsets and have created One Accenture Park, a virtual campus for onboarding and immersive learning including meeting rooms and collaborative experiences..”
- Elevated utilization and attrition metrics driven by strong demand trends – Utilization remains elevated (~92%) as they try to keep up w/ demand. Attrition went up from 17% to 19%. This is slightly ahead of pre-pandemic levels and seems driven by incredibly high demand for talent in the current environment (as opposed to cultural issues w/ attracting/retaining talent) which could negatively impact profitability. Related to this, their record level “billable headcount” additions (~54K) this quarter is re-assuring.
- 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/ >600K employees across the globe.
- Valuation:
- The stock is reasonably valued trading at close to a 3% forward yield and they have an easily covered 1% 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 >$6B 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.
- Investment Thesis:
- Market leader uniquely positioned to benefit from secular growth driven by evolving technologies including cloud, analytics, security, blockchain, IoT and artificial intelligence.
- Their differentiated strategy positions them well to continue gaining share. Having a consulting arm with deep industry expertise, combined with technology expertise, is a structural advantage as it enables them to provide end-to-end strategic technology solutions for their clients across industries.
- Their competitive advantage is their brand, their scale, and their breadth of expertise. They build on this advantage by continuously innovating and investing for future relevance. Disciplined M&A and investment in training and R&D helps them attract and retain top talent and reinforces their market leadership.
- Diversified industry and geographic end market exposure provides a level of defensiveness.
- High ROIC, strong FCF generation and disciplined capital allocation – enduring model for shareholder value creation, with share buybacks, a growing dividend and M&A supported by strong free cash flow generation and a solid balance sheet.
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]