Revising Our Price Estimate For Accenture To $149
Accenture (NYSE:ACN) remains a leader in the consulting and outsourcing domains, reporting solid growth in revenues despite intense and growing competition in both industries. The company expects its revenues to grow by 6-8% in 2018. Based on its guidance for 2018 and 2017 performance, we have revised our price estimate for Accenture’s stock from $125 to $149, which is still slightly below the current market price.
The 20% upward revision in our price estimate was driven by improvement in new signings across Consulting and Outsourcing. Furthermore, based on 2017 performance and the company’s 2018 guidance, we have revised our margin forecast upwards by about 100 basis points across verticals. Cumulatively, this has resulted in a $24 per share, or ~$16 billion, increase in our valuation for Accenture.
See our full analysis for Accenture
Consulting Business To Drive Revenue Growth
The Consulting division contributed around 54% of Accenture’s revenues in fiscal 2017 and accounts for over half of its value, per Trefis estimates. The Consulting business offers a variety of services across multiple verticals such as financial services, energy, healthcare, life sciences and retail. Over the past three years, the company’s Consulting revenues have grown at a CAGR of about 6% from $15.7 billion in 2014 to $18.75 billion in fiscal 2017 (fiscal year ends in August). An important factor for this growth has been the growth in new contract signings, which have grown at a CAGR of 5% from $17.1 billion to $19.8 billion in FY2017. The primary reason for the 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. These acquisitions have not only diversified the company’s geographical footprint but also augmented its portfolio of services in the Cloud, Internet of Things and cyber security domains. Trefis forecasts that, due to these initiatives, new signings for Consulting will increase to over $26 billion in 2024. As a result, Consulting revenues should grow to over $25 billion over the same timeframe.
Outsourcing Revenues Are Improving
According to our estimates, the Outsourcing division contributes approximately 45% of Accenture’s value. While this segment continues to outpace most of its peers, with net revenues growing at a CAGR of 4% from $14.3 billion in FY2014 to $16.1 billion in FY2017, new contract signings have declined at a CAGR of 3% to $17.6 billion in FY2017. As a result, the book-to-bill ratio has declined from 1.31x to 1.09x over this period.
The primary reason for the slowdown in Accenture’s Outsourcing business has been the fairly mixed demand for its outsourcing services, due to increased competition not only from firms offering lower rates but also from advancements in technology such as the advent of chatbots and Artificial Intelligence. However, Accenture has been fortifying its Outsourcing business by adding new capabilities such as robotic process automation (RPA) to its offerings. The company holds an edge with strong knowledge centers and a pool of experienced outsourcing 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 the Outsourcing business will grow at a CAGR of 4% in the coming years to reach $23 billion by the end of the forecast period in 2024. As a result, we expect Outsourcing revenues to grow to over $22 billion by 2024.
The company is adding RPA capabilities to its outsourcing business and moving up in the value chain to new high-growth areas, including AI, cloud and machine learning, for application and operations outsourcing. This should help the company improve its margins.
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