Current Price: $291 Price Target: $310
Position size: 4.2% Performance since inception (3/11): +76%
Key Takeaways:
- They beat estimates and raised full year guidance. Revenue (+21%) ahead of high end of guidance range and highest street estimate. Upped full year revenue growth guidance to +10% to +11%, from previous guidance of +6.5% to +8.5%,
- Broad based strength in demand – digital transformation is long-term secular growth driver to their business.
- They continue to take significant market share signifying solid business fundamentals. Bookings were up 39% YoY in Q3.
- CEO Julie Sweet said…“The dynamics in the market we are seeing are not only a recovery from the lower spending pattern at the onset of the pandemic, but a more sustained growth in demand, as companies race to modernize and accelerate their digital initiatives with compressed transformation.”
Additional highlights:
- Revenue was +21% constant currency YoY. Included 5pts from Fx. Adjusted EPS of $2.40 (+26% YoY) vs. consensus $1.90, aided by 40bps of op margin expansion. They no longer have the margin expansion tailwind from lower travel as they anniversary the benefit of the compare in this quarter.
- Strong demand trends are impacting their utilization and attrition metrics. Utilization is elevated (~93%) as they try to keep up w/ demand. Attrition went up from 12% to 17%. Up but similar to pre-pandemic levels. Demand for talent is high.
- Bookings growth demonstrating momentum in the business – Overall book-to-bill of 1.2. Consulting book-to-bill of 1.1 and outsourcing book-to-bill of 1.2. YTD bookings up 25% off a base of record sales through Q3 of last yr. (higher than all of ’19 or ’20 in the first 9 mos.). In the quarter, they also had a record 20 clients w/ bookings >$100 million.
- Now seeing broad based growth across geographies and end markets…
- 11 out of 13 industries growing double-digits
- N. America revenues +18% driven by double-digit growth in public service, software platforms, consumer goods, retail and travel services.
- Europe revenues +14% driven by double-digit growth in UK, Italy and Germany.
- Growth markets +15% led by double-digit growth in Japan and Brazil
- 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/ >500K employees across the globe. For instance, they’ve been heavily investing in upskilling their employees and their workforce is now ~46% 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 continue to expect to return at least $5.8 billion in cash to shareholders through dividends and share repurchases w/ an expected $8B to $8.5B in 2021 FCF (vs consensus $7.4B). They now expect to invest about $4B (up from $2B) in acquisitions this fiscal year.
- Valuation:
- The stock is undervalued trading at a ~4.4% forward yield at the midpoint of 2021 guidance (they’re already in Q4). FCF estimates for 2021 and 2022 will be going up. They have an easily covered 1.2% 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 $10B 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]