4 Reasons to Buy Accenture, and 1 Reason to Sell

4 Reasons to Buy Accenture, and 1 Reason to Sell

The IT services giant is still firing on all cylinders.

Accenture ( ACN 0.11% ) posted its second-quarter earnings report on March 17, easily beating analysts’ expectations.

The IT services company’s revenue rose 24% year over year (28% in local currency terms) to $15.05 billion, which cleared analysts’ estimates by $380 million. Its earnings per share ( EPS ) grew 25% on an adjusted basis to $2.54, which also exceeded Wall Street’s expectations by $0.13.

Does that earnings beat indicate it’s safe to invest in Accenture? Let’s review four reasons to buy the stock — and one reason to sell it — to find out. Image source: Getty Images. 1. Another quarter of accelerating revenue growth

Accenture serves five main industries: communications, media, and tech (21% of its second-quarter revenue); financial services (19%); health and public services (18%); products (29%); and resources (13%).

Accenture’s growth decelerated across all of those segments, except for health and public services, throughout the onset of the pandemic in 2020. However, all of its end markets recovered throughout 2021, and its year-over-year revenue growth accelerated over the past year. Communications, Media, and Tech 9% 19% 23% 32% 32% Financial Services 10% 16% 20% 24% 25% Health and Public Services 14% 21% 18% 23% 21% Products 2% 17% 25% 34% 34% Resources (7%) 3% 13% 17% 25% Total 5% 16% 21% 27% 28% YOY = Year over year. Local currency terms. Data source: Accenture.

Accenture mainly attributes its acceleration to its “strategic growth priorities,” which include its higher-growth cloud, interactive, industry X (digital transformation), and security businesses. Expanding those divisions reduces its overall dependence on legacy IT services and widens its moat against smaller digital transformation specialists like Globant . 2. Rosy revenue guidance for the rest of the year

For the third quarter, Accenture expects its revenue to grow 22%-26% year over year in local currency terms.

For the full year, it expects its revenue to rise 24%-26% in local currency terms (with a five percentage point boost from acquisitions), compared to its 11% growth in fiscal 2021. That’s much higher than its previous guidance for 19%-22% growth (which also included its acquisitions). Both its quarterly and annual estimates exceeded analysts’ expectations.

Accenture’s confident forecasts fully account for its recent exit from Russia in response to its invasion of Ukraine. That impact should be minimal since only about 0.3% of Accenture’s employees are based in Russia, but CFO KC McClure noted that its new guidance didn’t account for any “significant escalation or expansion” of the ongoing conflict. 3. Stable operating margins and earnings growth

Accenture’s operating margin dipped sequentially in the second quarter as it ramped up its investments, but remained flat year-over-year at 13.7%. Its adjusted earnings have also risen by more than 20% over the past four quarters. Adjusted EPS Growth (YOY) 6% 26% 29% 28% 25% Data source: Accenture. YOY = Year over year.

For the full year, Accenture expects its operating margin to expand by ten basis points to 15.2%, and for its adjusted EPS to increase 21%-23% — which was also higher than its previous guidance for 17%-20% earnings growth. 4. Stable free cash flow and shareholder returns

Accenture expects to generate $8 billion to $8.5 billion in free cash flow (FCF) in fiscal 2022, compared to a FCF of $8.4 billion in fiscal 2021.

It returned $5.9 billion of its FCF through $3.7 billion in buybacks and $2.2 billion in dividends in 2021, and it expects to boost those shareholder returns to “at least” $6.5 billion this year. It currently pays a forward yield of 1.25%.

Accenture’s stable FCF growth is impressive, especially considering it spent $4.2 billion on acquisitions in fiscal 2021 and plans to spend another $4 billion on acquisitions this year. Its ability to balance those acquisitions with consistent shareholder returns gives it an attractive blend of growth and value that many other blue-chip tech giants lack. The one reason to sell Accenture: its valuation

Accenture’s financials look solid, but the stock is also richly valued relative to other tech giants at 31 times forward earnings. By comparison, Microsoft trades at 26 times forward earnings, while Alphabet has a forward P/E ratio of 23.

Accenture’s higher valuation could limit its upside potential this year, especially if rising interest rates continue to push investors toward value stocks. Its strengths outweigh its weaknesses

Accenture’s stock isn’t cheap, but I believe its stable growth, broad diversification, and superior scale easily justify its higher valuation.

It also remains a secular play on the digitization of aging businesses, many of which […]

source 4 Reasons to Buy Accenture, and 1 Reason to Sell

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