Investors’ renewed interest in oil and gas stocks to take advantage of higher commodity prices weighed on market valuations in the technology sector, including Accenture (ACN).
Over the past three months, shares of the Dublin, Ireland-based provider of consulting and various outsourcing services and technology solutions are down more than 18%.
Once the geopolitical tensions, such as Russian aggression in Ukraine and the fossil fuel supply/demand mismatch, are resolved (which are essentially the main reasons for the rising energy prices), the market will shift its focus from the energy sector to other securities.
Then, Accenture, which is strongly positioned to benefit from an expected rapid increase in demand for IT services, could take off with a vengeance. Accenture serves a wide range of clients active in the financial services, media and healthcare sectors. The IT Services leader also supports the travel and retail industries.
With such promising prospects, I think Accenture should be on investors’ buy lists. In terms of the share price (~$302 at the time of writing), it doesn’t look expensive, as it is well below the 50-day moving average of ~$350.
Fiscal Q1-2022 Earnings Results
In the first quarter of Fiscal 2022 ended November 30, 2021, the company had total revenues of nearly $15 billion, up more than 27% year-over-year and beating analysts’ average forecast by $746.5 million.
On the bottom line, the company posted earnings per share (on a GAAP basis) of $2.78, beating the median consensus estimate by $0.15.
The company’s profitability improved as operating income rose 29% year-over-year to $2.43 billion, while the margin as a percentage of total sales also rose 20 basis points to 16.3%.
In addition, the company reported record (new) bookings of $16.8 billion. Consulting bookings were also a record, at $9.4 billion, while outsourcing bookings were worth $7.4 billion.
Looking Ahead
Regarding the business outlook for Fiscal 2022, Accenture expects revenue to rise between 19% to 22% (in local currency). Consensus growth estimates are currently 18.6%.
Earnings per share should fluctuate between $10.32 and $10.60, while the consensus estimate is $10.54.
Furthermore, the company said that the free cash flow is expected to be between $7.7 billion and $8.2 billion.
Accenture’s Financial Position
Accenture’s balance sheet is robust. As of November 30, 2021, it had $5.64 billion in cash on hand, while total debt was $3.5 billion. Its interest coverage ratio of 132 indicates that the company is easily paying the interest cost on outstanding debt.
ACN’s Piotroski F-Score of 8 and Altman Z-Score of 8.3 indicate that the business is strong and the company has no financial problems.
Accenture’s weighted average cost of capital (WACC) is 7.5%, while Accenture’s return on invested capital (ROIC) is 28.6%, showing that the company’s return is greater than the cost of raising the necessary capital for growth projects.
However, the current ratio of 1.2 suggests that working capital could be more efficient in allocating cash to meet short-term commitments.
Future Global Demand for IT Services
According to Statista, global spending on IT services in the coming years will be driven by the continued growth of cloud computing services for storing, managing, and processing data purposes.
Spending in this segment is expected to hit $1.2 trillion in 2022 and continue its growth after that.
The COVID-19 virus pandemic has confronted us with a harsh reality. All industrial sectors must digitize because they are outdated in most parts. As a leading provider of digital transformation and cloud projects, Accenture is well-positioned to benefit from the tailwinds this component of the demand for IT services will create.
Wall Street’s Take
In the past three months, 16 Wall Street analysts have issued a 12-month price target for ACN. The company has a Moderate Buy consensus rating based on 10 Buys, six Holds, and zero Sell ratings.
The average Accenture price target is $436.19, implying a 41.3% upside potential.
Conclusion
ACN stock is well-positioned to stage a strong recovery once the market’s focus shifts back to other sectors, including technology.
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