Current Price: $268 Price Target: $295 (raised from $267)
Position size: 4.4% Performance since inception (3/11): +61%
Key Takeaways:
- They beat estimates and issued strong guidance. Revenue was above their guided range and consensus. Full year guidance also better than expected.
- 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 25%.
- CEO Julie Sweet said…“What is becoming even more clear is that we are in an era of compressed transformation in which the winners by industry will be those who were earliest to re-platform their businesses in the cloud and have a digital core and new ways of working that allows them to continuously improve their operations.”
Additional highlights:
- Headwinds in hard hit industries are moderating – 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 combined with deep industry expertise is key to this. “Our clients need our deep technical and engineering skills and our unmatched set of relationships with the world leading technology ecosystem companies which are critical partners to us and to our clients.”
- Saw broad-based improvement across industries and geographic markets– headwinds in some industries persist but are moderating:
- In Q1 they “saw a broad based increase in demand that was faster than we anticipated 90 days ago.”
- Similar to last quarter, ~50% of revenues came from 7 industries that were less impacted from the pandemic that, in aggregate, continue to grow high-single-digits with continued double-digit growth in software platforms, Life Sciences & Public Service.
- >20% of revenue from clients in highly impacted industries – continue to be pressured but at a more moderate level– this includes travel, retail, energy, aerospace & defense and industrials. While performance varies by group, collectively declined low-single-digits. This is a big improvement from last quarter when this group declined mid-teens.
- This underscores the benefit of diversified industry end markets.
- Revenue was $11.8B above consensus estimates at $11.4B. Up +4% YoY, but included 2pt reduction from reimbursable travel costs which are a pass through. Adjusted EPS of $2.17 (+8% YoY), +6% vs. consensus $2.04. Updated guidance for 2Q revenue of $11.55-$11.95B (up 1%-4% YoY)
- New initiatives…
- Created Accenture Cloud First to help clients accelerate their move to the cloud – planned $3 billion 3 year investment in capabilities to help clients in re-platforming of global business in the cloud. Recognized as the leading systems integrator for each of AWS, Azure and Google Cloud platform as well as the leading multi cloud managed services provider.
- 360 degree value initiative – aimed at helping their clients achieve “responsible” business goals – clients are increasingly focused on sustainability, inclusion and diversity (rise of ESG is a catalyst to this). They say they are in a unique position to help companies “re-imagine and rebuild differently for the benefit of all.”
- Consulting revenues were $6.3B, down 1%, which includes a 3pt headwind from lower travel reimbursement.
- Outsourcing revenues were $5.4B, up 9% YoY
- Continued mix shift to “the new” – now 70% of revenue. Digital, cloud and security grew low single digits.
- Geographic breakdown: strongest markets were Japan and Australia (high-single-digit growth). Europe was down 1% (Italy strong, UK improving), North America was up 4%.
- Strong bookings of $13 billion, up 25% YoY balanced contribution from consulting (51%) and outsourcing (49%) with an overall book-to-bill of 1.1. Consulting book-to-bill of 1 and outsourcing book-to-bill of 1.3.
- Capital allocation: continuing all elements of their capital allocation program – they continues to return cash to shareholders through cash dividends and share repurchases. Invested approximately 500 million in acquisitions so far this yr. and expect to invest at least $1.7 billion in acquisitions, this fiscal year.
- They are now 45% women; on track for their 2025 goal of a 50-50 gender balance
- Guidance:
- For FY 21, they expect revenue to be in the range of 4% to 6% (up from previous guidance of 2% to 5% growth). This includes a 1pt hit from lower travel.
- Expect diluted EPS in the range of $8.02 to $8.25 or +8% to +11%. Street at $8.06.
- FY21 FCF to be in the range of $6B to $6.5B (previous guidance was $5.7B to $6.2B)
- Valuation:
- The stock is undervalued trading at a ~3.7% 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]