I am neutral on Accenture (ACN), as it has strong growth potential, general bullish sentiment from Wall Street analysts that is offset by a stretched valuation, and weak upside potential relative to its average price target.
Accenture is an Ireland-based multinational company that focuses on IT services and consulting. The company was founded in 2009 and incorporated in Dublin, Ireland.
Accenture’s Strengths
Accenture is a Fortune 500 company that reported revenues of $50.53 billion in 2021. The company has more than 91 Fortune Global 100 companies, and over three-fourths of the Fortune Global 500 companies, as clients.
Recent Results
Accenture reported $14.97 billion in revenue for the first quarter of fiscal year 2022, as compared to $11.76 billion generated in the first quarter of the fiscal year 2021, showing an increase of 27%. This placed the revenue more than $600 million over the higher end of its guidance range of $13.90 billion to $14.35 billion.
The company’s Consulting revenues for the first quarter of 2022 were $8.39 billion, up 33% in the first quarter of fiscal 2021. Outsourcing revenues were $6.57 billion, up 21% on a year-over-year basis.
Revenues by geographic market were $6.91 billion generated in North America, up 26% on a year-over-year basis. In the European market, revenues of $5.10 billion were generated, showing an increase of 28% year-over-year. Revenues in growth markets were $2.96 billion, an improvement of 30% as compared to the first quarter of fiscal 2021.
Gross margin for Q1 2022 was 32.9% as compared to the 33.1% gross margin in Q1 2021. Operating income increased to $2.43 billion as compared to the $1.89 billion on a year over year basis. Operating cash flow amounted to $531 million for the quarter.
As of November 30, 2021, Accenture’s total cash balance was $5.6 billion, as compared to $8.2 billion on August 31, 2021. On November 15, Accenture paid $0.97 cash dividends per share to shareholders, totaling $613 million.
The company has issued its second fiscal quarter 2022 guidance and expects revenue in that quarter to be between $14.30 billion to $14.75 billion, showing an improvement of 22% to 26%.
Valuation Metrics
ACN stock looks a bit pricey at the moment. It currently trades at a 22.48x enterprise value to EBITDA ratio, which seems quite high compared to its 5-year average ratio of 15.21x, though the company is expected to grow EBITDA by 17.0% in fiscal 2022 and by 9.3% in fiscal 2023.
The price to normalized earnings ratio also appears a bit high, as it currently trades at 38.37x compared to its 5-year average ratio of 25.53x, though it is expected to grow normalized earnings per share by 19.7% in fiscal 2022 and by 11.3% in fiscal 2023.
Wall Street’s Take
From Wall Street analysts, ACN earns a Moderate Buy analyst consensus based on 11 Buy ratings, 5 Hold ratings, and 0 Sell ratings in the past 3 months. Additionally, the average Accenture price target of $437.69 puts the upside potential at 5.6%.
Summary and Conclusions
Accenture is a leading player in its industry and enjoys a strong growth outlook as well as general bullishness from Wall Street analysts.
That said, the stock looks a bit pricey here, as it is trading well above its 5-year average valuation multiples and the average price target implies only mediocre upside over the next year. As a result, investors might want to wait for a pullback in the share price before adding shares.
Disclosure: At the time of publication, Samuel Smith did not have a position in any of the securities mentioned in this article.
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