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Investment Overview for Accenture (NYSE:ACN)
Below are key drivers of Accenture's value that present opportunities for upside or downside to the current Trefis price estimate for Accenture.
- Outsourcing Bookings: We currently estimate that Outsourcing revenues will grow at CAGR of nearly 4.5% going forward. In 2014, the company reported that revenues for Outsourcing division was $14.67 billion against new signings/bookings worth $18.2 billion. If revenues were to grow at a much slower rate due to rising competition and a slow down in outsourcing activity, implying flat growth in new outsourcing bookings, there can be 10% downside to the current Trefis Price estimate. If outsourcing revenues grow at a higher rate with new signings reaching over $26 billion by the end of our forecast period, we can expect an upside of 10% to the current Trefis Price estimate.
- Consulting Bookings: We currently estimate that Consulting revenues will grow at a CAGR of nearly 2% per year going forward. In 2014, the company reported revenues of $15.87 billion against new signings/bookings worth $16.7 billion. If revenues were to decline by 5% due to lower demand of consulting services and, thus, decline in the number of new consulting signings to $15 billion, we can expect a 10% downside to the current Trefis Price estimate. However, if consulting revenues grow at a rate of 5% due to new signings crossing $25 billion by the end of our forecast period, there can be an upside of 10% to the current Trefis Price estimate.
Company EBITDA Margins
- EBITDA Margins: We forecast that EBITDA margins to grow from 18.7% in 2014 to 19.7% by the end of our forecast period. This will be driver by the improvement in business conditions around the globe and improvement in discretionary spending by Accenture's clients. If EBITDA margins were to increase to 23% by the end of the forecast period, we can expect a 10% upside to the current Trefis price estimate. If margins were to decline due to rising competition, contract pricing pressure and slower economic growth, and reach 15%, we can expect a 10% downside to the current Trefis price estimate.
Accenture offers outsourcing and consulting services primarily to Fortune 500 companies. It helps its clients improve their business processes by leveraging technology and utilizing outsourced service providers wherever appropriate. For instance, Accenture may help the IT department of a client to outsource the development and maintenance of software applications used by company employees. The clients benefit through long term IT cost savings and improved processes for application development.
In Technology Consulting, Accenture competes with IBM at the top of the heap. Accenture's expertise in the technology space includes IT Strategy, Enterprise IT Architecture and Infrastructure, Management of Data (Security, Privacy and Storage), and the entire spectrum of Application Software, ranging from development to maintenance.
Accenture is one of the best-positioned companies in IT Services in today's economic context because of three reasons:
- It has a very resilient business model with a healthy mix of outsourcing (45%) and consulting (55%).
The firm is a market leader in outsourcing and is the growth engine of IT Services along with IBM and HP, supported by its extensive Global Delivery Network (GDN).
It has a strong consulting practice in the IT space with strong ability to leverage specialized industry expertise through its group of management consultants.
Market Leader in Outsourcing
The share of outsourcing in Accenture's revenues has gradually increased from ~ 40% in 2009 to ~46% in 2014. We expect it to stabilize around the current level going forward. Outsourcing is key to growth for IT Services and according to International Association of Outsourcing Professionals (IAOP), Accenture leads the outsourcing segment. Accenture is also one of the largest consulting companies in the world.
Growing Demand for Outsourcing
Since most of the companies can improve their profitability by outsourcing non-essential departments such as HR and payroll, the demand for such services is increasing. As a result, Accenture's outsourcing revenues have grown considerably in the past few quarters.
Change In Nature of Contracts To Affect Consulting Revenues
In recent quarters, Accenture has signed more long term contracts. Additionally, the number of short term and medium term contracts has dwindled. This imbalance in contract 'types' has led to a visible decline in quarterly consulting revenue as the pipeline for faster converting medium-term and short-term contract runs low. We expect this trend to continue in the coming quarters and Accenture to report lower consulting revenues.
Trefis Forecast Rationale for Consultant Bill Rate per Hour
This refers to the average rate per hour that Accenture charges its clients for its consultants working on a project.
Historically, the average bill rate increased by about 15% from 2005 to 2008.
In 2009, the bill rate declined by 6% as the consulting industry was hit hard by the economic recession forcing Accenture to cut down on bill rates. The rates remained almost flat in 2010 before increasing slightly in 2011 to reach $128. However, the bill rates declined in 2012 to $121 as soft demand in IT consulting forced Accenture to cut their cost so as to stay competitive with other companies.
Going forward we expect the bill rate to increase gradually as demand for IT consulting improves.
Trefis considered the following factors for its forecast:
Back to Company Overview
- Continued increases in demand
- According to the firm technology consulting is continuing to show growth as clients avail the services offered by Accenture.
- This should help the average bill rate recover as the business environment recovers and firms increasingly rely on consulting services to sustain growth in a competitive and fast changing environment.
- IT spend to increase going forward
- Firms hire consultants in order to help improve their business. This is purely a discretionary and not necessary spend which can be cut back immediately if a firm has to cut costs.
- As US economy went into recession several firms deferred decisions about new work and put a hold on extensions in current projects. With the economic environment improving, the IT spend is expected to increase in going forward. This will result in a greater demand for technology consulting solutions allowing Accenture to charge higher in the future.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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