Why Accenture Is Worth $118

-39.49%
Downside
373
Market
226
Trefis
ACN: Accenture logo
ACN
Accenture

Accenture (NYSE:ACN) is a leader for many of its services in the consulting domain, according to the research firms IDC and Gartner.  However, over the past few quarters it has witnessed strong growth in revenues from its consulting division, while revenue growth from outsourcing is slipping due to intense competition. One of the primary reasons for this has been an uptick in the consulting order book on the back of acquisitions and a decline in new signings for outsourcing. In this note, we explore the factors that justify our $118 price estimate for Accenture.

See our full analysis for Accenture

Consulting Business To Will Drive Revenue Growth For Accenture

Relevant Articles
  1. Why Has Accenture Stock More Than Doubled Since Late 2018?
  2. Cognizant Technology Solutions’ Stock To Continue Its Rally?
  3. Demand Recovery To Propel Accenture Stock Past $300?
  4. Has Accenture Stock Peaked?
  5. Up 16% This Year, Accenture Stock Headed Back Down?
  6. Accenture Stock Peaked At $200?

The consulting division makes up 57% of Accenture’s stock value and contributed 54.3% to the revenues in FY2016. Accenture’s consulting division offers services across multiple domains including finance & finance performance, operations, strategy, risk management and talent & organization performance.  These services are offered across multiple verticals and industries such as banking, capital markets, chemical, energy, health, insurance, life sciences, retail etc.

Over the past three years, consulting revenues have grown at a CAGR of 6.6% from $15.71 billion to $17.87 billion in FY16. (Fiscal years end with August.) An important factor for this growth has been the growth in new contract signings, which have grown at a CAGR of 5.9% from $17.08 billion to $19.14 billion in FY2016. As a result, the book-to-bill ratio, the key metric that ascertains the growth in new contracts, has increased from 0.98x to 1.04x in the period.

The primary reason for growth in new signings has been strong double-digit growth in strategy and consulting services for digital related services. Accenture has been able to strategically position itself in these domains through acquisitions over the past few years. [1] These acquisitions not only diversified Accenture’s geographical footprint, but also augmented its portfolio of services in the emerging Cloud, Internet-of-Things, mobile computing and cyber security domains. Furthermore, opportunities in social media, mobile, analytics and cloud (SMAC) are abundant. Companies are looking to tightly integrate their existing services with SMAC. Accenture, through its consulting practice, has a significant body of knowledge on clients’ businesses and processes, which helps it stay closer to clients. Trefis forecasts that, due to these initiatives, new signings for consulting will increase to $25.4 billion in 2023. As a result, consulting revenues should grow to $23.4 billion.

Outsourcing Will Continue To Decline

According to our estimates, the outsourcing division contributes approximately 43.2% to Accenture’s value. While this division continues to outpace its peers, net revenues grew at a tepid CAGR of 2.49% from $14.29 billion in FY2014 to $15.01 billion in 2016. Additionally, new contract signings have declined at a CAGR of 7.1% from $18.8 billion in FY2014 to $16.23 billion in FY2016. As a result, the book-to-bill ratio has declined from 1.31x to 1.08x over this period.

The primary reason for slowdown in Accenture’s outsourcing has been the soft demand for its outsourcing services, due to increased competition. Companies such as Infosys, Wipro and TCS are operating successfully in the outsourcing space. Generally these companies, especially the Indian ones, operate on a lower billing rate and have dented Accenture’s market share in the outsourcing industry. Nevertheless, Accenture holds an edge with superior knowledge centers and its pool of experienced management and technology consultants. Trefis expects that Accenture will continue to leverage its knowledge and technical know-how to bag more outsourcing contracts and keep competition at bay. Accordingly, we believe that new signings for outsourcing will grow at a timid pace in the future to reach $18.8 billion by the end of forecast period in 2023. As a result, outsourcing revenues would grow to $17.4 billion by2023.

At present, we have a $118 price estimate for Accenture, which is 2.5% below its current market price.

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

Notes:
  1. Read about Accenture’s acquisition in 2016 here. []