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Accenture: Should ACN Still Qualify as Best Idea, After
Anticipating Next Set of Issues to Face the Stock?
Highlights
Our January 12th research piece featured Accenture as our best idea based on: 1) analysis of Accenture's
distinctive growth, FCF, and ROC attributes compared to tech stocks in general, and 2) our favorable
demand progression thesis emphasizing that a "transformational" services demand phase would drive
significant upside to consensus. This piece also asserted that our $57 target price was conservative after
accounting for Accenture's distinctive attributes (conveyed by evaluating metrics across tech stock
universe) and our expectation of upward revisions to Street estimates. Today, we are raising our target
price to $62.75. And, based on reasons explained herein, we are keeping Accenture on Bernstein's bestidea
list, while also recognizing that Accenture's stock is not as "best" of an idea today (compared to
January) due to its recently heightened valuation and due to other factors we anticipate will become
pertinent – i.e., factors, such as supply-side reasons to somewhat govern Accenture's growth, which could
cause incrementally more patience to be required for substantial additional stock appreciation.
Reasons to remain positive on Accenture, with stock still on Bernstein's best idea list
Despite the recent rally in the stock, we are maintaining Accenture as a top idea because:
More upside to consensus: We see further upside to consensus, as shown in Exhibits 1& 2. We
forecast FY11 revenue growth of 16.3%, versus consensus of 13.3%. We forecast FY11 EPS of $3.30,
which is 6.0 cents higher than consensus of $3.24 (note that we anticipate consensus could rise as
analysts have more time to revise their estimates following Accenture's March 24th earnings report).
Transformational demand phase should last longer: We continue to contend that a strong phase of
transformational services demand is underway (likely now priced into stock) and will likely last multiple
quarters (not fully priced into stock).
Less economic risk than perceived: While investors are prone to have substantial worries about macro
issues (e.g., issues in Japan, concerns about Middle East/Northern Africa), we reiterate that Accenture's
growth can be resilient in the face of these issues and in scenarios involving slower GDP growth. On a
related note, despite these macro issues, we are comfortable that Accenture's upwardly revised FY11
guidance can still prove to be conservative.
Distinctive attributes vs. other tech stocks: We reiterate that, compared to other tech stocks (as shown
in Exhibits 3& 4), Accenture has distinctive attributes, that are not fully appreciated by investors (i.e.,
they're more appreciated now than they were a couple of months ago, but we still see room for more
appreciation). These attributes of Accenture include: late-cycle-demand traits (i.e., we reiterate
Accenture is in the sweet spot of demand cycle); GARP profile; above-average revenue and EPS growth;
growth resiliency that we maintain is much better than most tech stocks given our research showing
Accenture's growth is not as wed to GDP as is commonly perceived; way-above-average ROC; FCF that
is consistently better than earnings; and substantial room to give more cash back to shareholders.
Anticipating the next set of issues for Accenture's stock
While we still see solid overall support for our favorable stance on Accenture particularly on a relative
basis (i.e., relative to other tech stocks), we also anticipate a few factors that could cause somewhat more
patience to be required for substantial additional appreciation in Accenture's stock. We discuss these
factors in the bullets below – i.e., factors that could represent the next set of key issues to face the stock:
Supply could become more of a constraint than demand... We think Accenture may be wise to
somewhat govern its growth in upcoming quarters in the name of delivery excellence (i.e., the most
important attribute demanded by Accenture's clients) and cost prudence (e.g., curtailing costs of
extra subcontractors and ramping up new staff): We underscore that the transformational services
business is tougher to rapidly scale than other services, such as the core application maintenance services
of the top Indian firms. Multiple quarters of high growth in transformation services could put some strain
on Accenture's staff, and we think it could be appropriate for Accenture to prudently govern its growth
rate in upcoming quarters, particularly following the past two quarters that experienced substantially
heightened growth. Exhibit 5 conveys the headcount growth complexity involved in supporting
Accenture's strong FY11 revenue growth. This supply-side point is positive for pricing power.
Accenture's long-term revenue growth should be around 7-9%, versus our estimate of 14.3% for
FY11 (in local currency): Accenture will likely need to address its long-term growth outlook at its
upcoming NY Analyst Day on April 14th, and this could modestly dampen sentiment for Accenture's
stock, given that its Y/Y comparisons will get meaningfully tougher in upcoming quarters and given that
Accenture's long-term growth outlook should be materially lower than the growth to be achieved in FY11
(unlikely a big surprise for investors, but we look at this topic for completeness and since it could
become more pertinent). As explained later in this piece, if we assume worldwide GDP growth of around
4% annually, we think the IT services industry should generally grow at 5-6%, and Accenture should
grow in the vicinity of 8% (i.e., in the range of 7-9%), or 2x worldwide GDP growth (though we reiterate
that Accenture's growth should not be highly sensitive to moves in GDP growth).
Negative perceptions could stem from weakness in certain parts of IT hardware sector: We see a
number of indications (i.e., some public and some from industry contacts) that the hardware industry is
experiencing pockets of weakness (e.g., risk of deceleration in x86 servers, slowdown in PC growth,
struggles at certain communication equipment players). And we recognize that weakness in parts of the
hardware industry could make it more difficult for investors to fully believe in our positive demand thesis
for Accenture (and for Indian stocks and Sapient). That said, to the extent that weakness in the hardware
category causes negative "perceptions" about IT services demand, this could create "buy-on-the-dip"
opportunities for investors in well-positioned services stocks such as Accenture (and Cognizant and
Sapient). Importantly, due to multiple reasons (such as those emphasized in our Nov. 12th research after
Cisco's disappointing report), we think it is quite logical that the hardware industry can struggle, while
demand for systems integration services and enterprise software can thrive (and we remain firm in our
conviction about improved demand for systems integration and other transformational services). This
situation (i.e., our view that demand trends are more favorable for leading systems integrators than for
hardware-oriented players) could make Accenture a sound bet relative to the tech sector.
Heightened valuation & expectations: Accenture is now trading at a 16.4% premium to the S&P 500
(based on CY11 P/E figures). We think a 15-20% P/E premium should be sustainable (and north of 20%
has precedent); note our target price of $62.75 assumes a target P/E with a 17.4% P/E premium applied to
our CY12 EPS estimate (Exhibit 16). So, while we still see some room for P/E expansion, this room has
narrowed after the stock's rally. And, expectations on the Street have jumped higher. For example:
After arguing that Accenture would report significant upside to consensus revenue and bookings for
the February quarter, we were somewhat perplexed at the performance of Accenture's stock in the days
preceding Accenture's February quarter earnings report when the stock traded relatively cautiously due
to a view conveyed on the Street that the "seasonally weak" February quarter was unlikely to achieve
significant top-line upside. Accenture put this view to rest by reporting actual revenues 5.5% above
consensus and by reporting bookings well above Street expectations. These results have clearly raised
expectations and have likely caused less bullish analysts to recognize that Accenture's growth
trajectory is experiencing more than just an "incremental" recovery. Additionally, the May quarter is
Accenture's seasonally strongest quarter, so we think analysts who emphasize seasonality will be more
likely to exude higher expectations ahead of the next earnings report.
Following Accenture's impressive February quarter earnings report, scepticism concerning our
argument that Accenture is in the sweet spot of the demand cycle has subsided, which means
expectations on the Street have been materially raised. That said, we still hear questions implying
some are not convinced that Accenture's clients are so willing to invest in transformational initiatives,
and we expect macro issues will cause some scepticism to linger.
Investment Conclusion
Summary view on Accenture (Recap)
We rate Accenture outperform (and top idea). We reiterate that demand patterns are progressing in
Accenture's favor, as we think strong management consulting demand (in 2010) has now progressed into
improved demand for systems integration deals (including more "transformational" initiatives), along with
decent prospects for the outsourcing business. We see further upside to consensus revenue and EPS.
Distinctive Accenture attributes against tech stocks: In our January 12th research (Accenture, Cognizant,
Infosys: Seeing Bullish Demand Progression; ACN Top Idea; Raising ACN, INFY, CTSH Targets), we
showed that Accenture has distinctive attributes (revenue growth, ROC, stability of growth) relative to
other tech stocks that are trading at high free cash flow yields (note that this analysis is updated herein),
thus we contend Accenture deserves a position high on investors' lists of core tech stock holdings.
Favorable demand progression pattern: We maintain Accenture's growth is much less reliant on
economic trends than is perceived (as explained in our research on IT services cyclicality). Also, we
reiterate that strong management consulting demand (which we witnessed throughout 2010) has now
progressed into improved demand for Accenture's systems integration and outsourcing services. Stated
differently, we see a favorable demand progression from clients' planning efforts into implementation
projects and operational support, as clients' appetites to invest have improved.
Growth resiliency: While some worry about Accenture's revenue growth and bookings outlook in light
of economic uncertainties, we reiterate our view that demand improvement in the IT services industry
does NOT require substantial GDP improvement, but rather the absence of shocks to clients’ decision
making — likely making leading IT services firms (e.g., Accenture, Cognizant) more resilient than other
tech firms that are more wed to GDP trends.
Margins fine: We think Accenture can achieve its FY11 margin expansion target, with 17 bps of Y/Y
margin expansion in the February 2011 quarter a step in the right direction.
Views/implications across Computer Services stocks
Our latest data points reinforce our above-consensus estimates for Accenture, Cognizant, Infosys, and
Sapient. Note that Sapient has the most valuation upside potential. We have outperform ratings on
Sapient, Accenture, Cognizant, and ADP. We have market-perform ratings on Visa, MasterCard, Paychex,
and Infosys. And, we have an underperform rating on CSC.
Reasons to Remain Positive on Accenture
Despite the recent rally in the stock, we are maintaining Accenture as a top idea, primarily due to the
reasons discussed in the following subsections:
More upside to consensus
We see further upside to Accenture's consensus estimates, as shown in Exhibits 1 and 2.
May 2011 quarter
For the May 2011 quarter, we forecast Y/Y revenue growth of 18.2%, versus consensus of 14.0%.
Accenture's revenue guidance calls for $6.30 to $6.50 billion, with the high end of this range implying
16.7% Y/Y revenue growth and the low end implying 13.1% Y/Y revenue growth. Note that May
quarter revenue guidance assumes a +4% Y/Y boost from currency.
We forecast May quarter EPS of $0.92, which is 3.6 cents higher than consensus of $0.88.
Fiscal year 2011 (ending August 2011)
We forecast FY11 revenue growth of 16.3%, versus consensus of 13.3%. Accenture's FY11 guidance
calls for 11-14% revenue growth (in local currency), and this implies 13-16% revenue growth in US
dollars.
We forecast FY11 EPS of $3.30, which is 6.0 cents higher than consensus of $3.24 (note that we
anticipate consensus could rise as analysts have more time to revise their estimates following Accenture's
March 24th earnings report). Accenture's FY11 EPS guidance range is $3.22-$3.30.
Fiscal year 2012 (ending August 2012)
For FY12, we somewhat conservatively forecast revenue growth of 7.1%, versus consensus of 9.1% (off
of a revenue base in FY11 that we think is too low). And we forecast FY12 EPS of $3.74, which is 14.5
cents higher than consensus of $3.60.
Transformational demand phase should last longer
We continue to contend that a transformational services demand phase is underway (likely now priced into
stock) and will likely last multiple quarters (not fully priced into stock). How long will this
transformational services demand phase last, especially if some of today's strong demand is attributable to
pent-up demand? Accenture's latest report (e.g., 18% local currency revenue growth) confirms that a
transformational services demand phase (where Accenture should thrive) is solidly underway. And we
reiterate that this favorable demand phase is unlikely to be stopped soon, given the multi-quarter nature of
transformational services work.
For instance, systems integration initiatives (e.g., ERP software deployment) at large companies often take
over a year, and stoppages of such initiatives midstream generally do not occur, unless very negative
circumstances hit close to home. In other words, we see ingredients in place for this transformational phase
of demand to last multiple quarters (e.g., more than one year), partly due to substantial work that didn't get
done during the 2-year financial crisis (i.e., reflecting pent-up demand). Also, we underscore that large
companies generally cannot implement systems and/or transform business processes in less than 6 months
(i.e., often requires 1 or more years).
Moreover, as conveyed in our earlier research on the strategy consulting market, we think 2011's uptick in
systems integration initiatives is supported by a huge amount of planning work that has already been
completed over the past year.
Less economic risk than perceived
While investors are prone to have substantial worries about macro issues (e.g., issues in Japan, concerns
about Middle East/Northern Africa), we contend that Accenture's growth can be resilient in the face of these
issues and in scenarios involving slower GDP growth. We underscore our ongoing view that the primary
risk to systems integration demand is a major macro-shock to clients' decision making, while periods of
poor GDP growth (if it occurs without people being shocked by it) should not cause major problems for the
demand of top consulting / systems integration businesses. On a related note, despite the issues in Japan
and Middle East/Northern Africa, we are comfortable that Accenture's upwardly revised FY11 guidance can
still prove to be conservative.
Accenture's distinctive attributes vs. tech stocks and the Tech Titans
We reiterate that, compared to other tech stocks (as shown in Exhibits 3& 4), Accenture has distinctive
attributes, that are not fully appreciated by investors. These attributes of Accenture include: late-cycledemand
traits (i.e., we reiterate Accenture is in the sweet spot of demand cycle); GARP profile; aboveaverage
revenue and EPS growth; growth resiliency that we maintain is much better than most tech stocks
given our research showing Accenture's growth is not as wed to GDP as is commonly perceived; wayabove-
average ROC; FCF that is consistently better than earnings; and substantial room to give more cash
back to shareholders.
Note that Exhibits 3& 4 provide updates to the tech stocks' metrics analysis that we featured in our January
12th research piece, which placed Accenture on Bernstein's best idea list.
Evaluating Accenture against "Tech Titans" with high FCF yields:
In Exhibit 3, we've compared Accenture against a group of seven high-FCF-yielding stocks that we're
calling the Tech Titans (largely enterprise technology businesses). Unlike certain high-FCF-yielding stocks
that have had languishing stock performance, Accenture's stock has performed well, and we see good
prospects for further performance by Accenture. Moreover, compared to the Tech Titans, Accenture has
above-average revenue growth, EPS growth, and ROC (return on capital):
Consensus revenue growth estimates for Accenture are 13.2% and 8.9% in CY11 and CY12, greater than
the means (excluding Dell) of 8.6% and 7.1% in CY11 and CY12, respectively, for the Tech Titans.
Also note that we're forecasting above-consensus revenue growth of 16.3% (in US dollar terms) for
Accenture in CY11.
Consensus EPS growth estimates for Accenture in CY11 and CY12 are 19.5% and 12.7%, greater than
the means (excluding Dell) of 8.4% and 11.2% in CY11 and CY12, respectively, for the Tech Titans. In
fact, Accenture has a better CY11 EPS growth outlook than all of the Tech Titans in Exhibit 3. Also note
that we're forecasting above-consensus EPS growth of 23.3% for Accenture in CY11.
Accenture's ROC is 52.0% (on a LTM basis), compared to the mean (excluding Dell) of 18.0% for the
seven Tech Titans. Accenture's ROC is the highest among the Tech Titans.
Evaluating Accenture against a broader group of tech stocks with high FCF yields:
In the same fashion in Exhibit 4, we've compared Accenture against a broader group of 16 high-FCFyielding
tech stocks. Compared to these 16 stocks, Accenture has above-average revenue growth, EPS
growth, and ROC (return on capital):
Consensus revenue growth estimates for Accenture in CY11 and CY12 are 13.2% and 8.9%, greater than
the medians of 8.2% and 6.0% in CY11 and CY12, respectively, for the 16 large-cap technology
companies with high FCF yield. Also note that we're forecasting above-consensus revenue growth of
16.3% for Accenture in CY11.
Consensus EPS growth estimates for Accenture in CY11 and CY12 are 19.5% and 12.7%, compared to
the medians of 12.7% and 10.5% in CY11 and CY12, respectively, for these 16 large-cap technology
companies. Also, we're forecasting above-consensus EPS growth of 23.3% for Accenture in CY11.
Accenture's ROC is 52.0% (on a LTM basis), compared to the median of 10.3% for the 16 large-cap
technology companies with high FCF yields.
Comparing Accenture's FCF-based valuation to the Tech Titans:
Due to these distinctive growth and ROC attributes, we argued in our January 12th research piece that
Accenture's valuation deserved a materially above-average FCF multiple (see this prior research –
Accenture, Cognizant, Infosys: Seeing Bullish Demand Progression; ACN Top Idea; Raising ACN,
INFY, CTSH Targets). And, we argued in this piece that Accenture was very attractively valued and that
our $57 target price was conservative. At that time, Accenture was trading at an EV/FCF multiple of only
11.1, which was only modestly higher than the then Tech Titan mean (excluding Dell) of 10.9.
Alternatively stated, despite having above-average growth and ROC, Accenture's FCF/EV yield was 9.0%,
which was only modestly lower than the Tech Titan mean (excluding Dell) of 9.2%.
Over the last couple of months, Accenture stock has rallied. Still, we believe Accenture's stock is
reasonably attractive despite the stock getting more credit today for its distinctive attributes, particularly its
growth that is exceeding the Street's prior expectations. Accenture is now trading at an EV/FCF multiple of
12.4, which is higher than the Tech Titan mean (excluding Dell) of 9.9. Alternatively stated, Accenture's
FCF/EV yield is 8.1%, which is lower than the Tech Titan mean (excluding Dell) of 10.1%.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Accenture: Should ACN Still Qualify as Best Idea, After
Anticipating Next Set of Issues to Face the Stock?
Highlights
Our January 12th research piece featured Accenture as our best idea based on: 1) analysis of Accenture's
distinctive growth, FCF, and ROC attributes compared to tech stocks in general, and 2) our favorable
demand progression thesis emphasizing that a "transformational" services demand phase would drive
significant upside to consensus. This piece also asserted that our $57 target price was conservative after
accounting for Accenture's distinctive attributes (conveyed by evaluating metrics across tech stock
universe) and our expectation of upward revisions to Street estimates. Today, we are raising our target
price to $62.75. And, based on reasons explained herein, we are keeping Accenture on Bernstein's bestidea
list, while also recognizing that Accenture's stock is not as "best" of an idea today (compared to
January) due to its recently heightened valuation and due to other factors we anticipate will become
pertinent – i.e., factors, such as supply-side reasons to somewhat govern Accenture's growth, which could
cause incrementally more patience to be required for substantial additional stock appreciation.
Reasons to remain positive on Accenture, with stock still on Bernstein's best idea list
Despite the recent rally in the stock, we are maintaining Accenture as a top idea because:
More upside to consensus: We see further upside to consensus, as shown in Exhibits 1& 2. We
forecast FY11 revenue growth of 16.3%, versus consensus of 13.3%. We forecast FY11 EPS of $3.30,
which is 6.0 cents higher than consensus of $3.24 (note that we anticipate consensus could rise as
analysts have more time to revise their estimates following Accenture's March 24th earnings report).
Transformational demand phase should last longer: We continue to contend that a strong phase of
transformational services demand is underway (likely now priced into stock) and will likely last multiple
quarters (not fully priced into stock).
Less economic risk than perceived: While investors are prone to have substantial worries about macro
issues (e.g., issues in Japan, concerns about Middle East/Northern Africa), we reiterate that Accenture's
growth can be resilient in the face of these issues and in scenarios involving slower GDP growth. On a
related note, despite these macro issues, we are comfortable that Accenture's upwardly revised FY11
guidance can still prove to be conservative.
Distinctive attributes vs. other tech stocks: We reiterate that, compared to other tech stocks (as shown
in Exhibits 3& 4), Accenture has distinctive attributes, that are not fully appreciated by investors (i.e.,
they're more appreciated now than they were a couple of months ago, but we still see room for more
appreciation). These attributes of Accenture include: late-cycle-demand traits (i.e., we reiterate
Accenture is in the sweet spot of demand cycle); GARP profile; above-average revenue and EPS growth;
growth resiliency that we maintain is much better than most tech stocks given our research showing
Accenture's growth is not as wed to GDP as is commonly perceived; way-above-average ROC; FCF that
is consistently better than earnings; and substantial room to give more cash back to shareholders.
Anticipating the next set of issues for Accenture's stock
While we still see solid overall support for our favorable stance on Accenture particularly on a relative
basis (i.e., relative to other tech stocks), we also anticipate a few factors that could cause somewhat more
patience to be required for substantial additional appreciation in Accenture's stock. We discuss these
factors in the bullets below – i.e., factors that could represent the next set of key issues to face the stock:
Supply could become more of a constraint than demand... We think Accenture may be wise to
somewhat govern its growth in upcoming quarters in the name of delivery excellence (i.e., the most
important attribute demanded by Accenture's clients) and cost prudence (e.g., curtailing costs of
extra subcontractors and ramping up new staff): We underscore that the transformational services
business is tougher to rapidly scale than other services, such as the core application maintenance services
of the top Indian firms. Multiple quarters of high growth in transformation services could put some strain
on Accenture's staff, and we think it could be appropriate for Accenture to prudently govern its growth
rate in upcoming quarters, particularly following the past two quarters that experienced substantially
heightened growth. Exhibit 5 conveys the headcount growth complexity involved in supporting
Accenture's strong FY11 revenue growth. This supply-side point is positive for pricing power.
Accenture's long-term revenue growth should be around 7-9%, versus our estimate of 14.3% for
FY11 (in local currency): Accenture will likely need to address its long-term growth outlook at its
upcoming NY Analyst Day on April 14th, and this could modestly dampen sentiment for Accenture's
stock, given that its Y/Y comparisons will get meaningfully tougher in upcoming quarters and given that
Accenture's long-term growth outlook should be materially lower than the growth to be achieved in FY11
(unlikely a big surprise for investors, but we look at this topic for completeness and since it could
become more pertinent). As explained later in this piece, if we assume worldwide GDP growth of around
4% annually, we think the IT services industry should generally grow at 5-6%, and Accenture should
grow in the vicinity of 8% (i.e., in the range of 7-9%), or 2x worldwide GDP growth (though we reiterate
that Accenture's growth should not be highly sensitive to moves in GDP growth).
Negative perceptions could stem from weakness in certain parts of IT hardware sector: We see a
number of indications (i.e., some public and some from industry contacts) that the hardware industry is
experiencing pockets of weakness (e.g., risk of deceleration in x86 servers, slowdown in PC growth,
struggles at certain communication equipment players). And we recognize that weakness in parts of the
hardware industry could make it more difficult for investors to fully believe in our positive demand thesis
for Accenture (and for Indian stocks and Sapient). That said, to the extent that weakness in the hardware
category causes negative "perceptions" about IT services demand, this could create "buy-on-the-dip"
opportunities for investors in well-positioned services stocks such as Accenture (and Cognizant and
Sapient). Importantly, due to multiple reasons (such as those emphasized in our Nov. 12th research after
Cisco's disappointing report), we think it is quite logical that the hardware industry can struggle, while
demand for systems integration services and enterprise software can thrive (and we remain firm in our
conviction about improved demand for systems integration and other transformational services). This
situation (i.e., our view that demand trends are more favorable for leading systems integrators than for
hardware-oriented players) could make Accenture a sound bet relative to the tech sector.
Heightened valuation & expectations: Accenture is now trading at a 16.4% premium to the S&P 500
(based on CY11 P/E figures). We think a 15-20% P/E premium should be sustainable (and north of 20%
has precedent); note our target price of $62.75 assumes a target P/E with a 17.4% P/E premium applied to
our CY12 EPS estimate (Exhibit 16). So, while we still see some room for P/E expansion, this room has
narrowed after the stock's rally. And, expectations on the Street have jumped higher. For example:
After arguing that Accenture would report significant upside to consensus revenue and bookings for
the February quarter, we were somewhat perplexed at the performance of Accenture's stock in the days
preceding Accenture's February quarter earnings report when the stock traded relatively cautiously due
to a view conveyed on the Street that the "seasonally weak" February quarter was unlikely to achieve
significant top-line upside. Accenture put this view to rest by reporting actual revenues 5.5% above
consensus and by reporting bookings well above Street expectations. These results have clearly raised
expectations and have likely caused less bullish analysts to recognize that Accenture's growth
trajectory is experiencing more than just an "incremental" recovery. Additionally, the May quarter is
Accenture's seasonally strongest quarter, so we think analysts who emphasize seasonality will be more
likely to exude higher expectations ahead of the next earnings report.
Following Accenture's impressive February quarter earnings report, scepticism concerning our
argument that Accenture is in the sweet spot of the demand cycle has subsided, which means
expectations on the Street have been materially raised. That said, we still hear questions implying
some are not convinced that Accenture's clients are so willing to invest in transformational initiatives,
and we expect macro issues will cause some scepticism to linger.
Investment Conclusion
Summary view on Accenture (Recap)
We rate Accenture outperform (and top idea). We reiterate that demand patterns are progressing in
Accenture's favor, as we think strong management consulting demand (in 2010) has now progressed into
improved demand for systems integration deals (including more "transformational" initiatives), along with
decent prospects for the outsourcing business. We see further upside to consensus revenue and EPS.
Distinctive Accenture attributes against tech stocks: In our January 12th research (Accenture, Cognizant,
Infosys: Seeing Bullish Demand Progression; ACN Top Idea; Raising ACN, INFY, CTSH Targets), we
showed that Accenture has distinctive attributes (revenue growth, ROC, stability of growth) relative to
other tech stocks that are trading at high free cash flow yields (note that this analysis is updated herein),
thus we contend Accenture deserves a position high on investors' lists of core tech stock holdings.
Favorable demand progression pattern: We maintain Accenture's growth is much less reliant on
economic trends than is perceived (as explained in our research on IT services cyclicality). Also, we
reiterate that strong management consulting demand (which we witnessed throughout 2010) has now
progressed into improved demand for Accenture's systems integration and outsourcing services. Stated
differently, we see a favorable demand progression from clients' planning efforts into implementation
projects and operational support, as clients' appetites to invest have improved.
Growth resiliency: While some worry about Accenture's revenue growth and bookings outlook in light
of economic uncertainties, we reiterate our view that demand improvement in the IT services industry
does NOT require substantial GDP improvement, but rather the absence of shocks to clients’ decision
making — likely making leading IT services firms (e.g., Accenture, Cognizant) more resilient than other
tech firms that are more wed to GDP trends.
Margins fine: We think Accenture can achieve its FY11 margin expansion target, with 17 bps of Y/Y
margin expansion in the February 2011 quarter a step in the right direction.
Views/implications across Computer Services stocks
Our latest data points reinforce our above-consensus estimates for Accenture, Cognizant, Infosys, and
Sapient. Note that Sapient has the most valuation upside potential. We have outperform ratings on
Sapient, Accenture, Cognizant, and ADP. We have market-perform ratings on Visa, MasterCard, Paychex,
and Infosys. And, we have an underperform rating on CSC.
Reasons to Remain Positive on Accenture
Despite the recent rally in the stock, we are maintaining Accenture as a top idea, primarily due to the
reasons discussed in the following subsections:
More upside to consensus
We see further upside to Accenture's consensus estimates, as shown in Exhibits 1 and 2.
May 2011 quarter
For the May 2011 quarter, we forecast Y/Y revenue growth of 18.2%, versus consensus of 14.0%.
Accenture's revenue guidance calls for $6.30 to $6.50 billion, with the high end of this range implying
16.7% Y/Y revenue growth and the low end implying 13.1% Y/Y revenue growth. Note that May
quarter revenue guidance assumes a +4% Y/Y boost from currency.
We forecast May quarter EPS of $0.92, which is 3.6 cents higher than consensus of $0.88.
Fiscal year 2011 (ending August 2011)
We forecast FY11 revenue growth of 16.3%, versus consensus of 13.3%. Accenture's FY11 guidance
calls for 11-14% revenue growth (in local currency), and this implies 13-16% revenue growth in US
dollars.
We forecast FY11 EPS of $3.30, which is 6.0 cents higher than consensus of $3.24 (note that we
anticipate consensus could rise as analysts have more time to revise their estimates following Accenture's
March 24th earnings report). Accenture's FY11 EPS guidance range is $3.22-$3.30.
Fiscal year 2012 (ending August 2012)
For FY12, we somewhat conservatively forecast revenue growth of 7.1%, versus consensus of 9.1% (off
of a revenue base in FY11 that we think is too low). And we forecast FY12 EPS of $3.74, which is 14.5
cents higher than consensus of $3.60.
Transformational demand phase should last longer
We continue to contend that a transformational services demand phase is underway (likely now priced into
stock) and will likely last multiple quarters (not fully priced into stock). How long will this
transformational services demand phase last, especially if some of today's strong demand is attributable to
pent-up demand? Accenture's latest report (e.g., 18% local currency revenue growth) confirms that a
transformational services demand phase (where Accenture should thrive) is solidly underway. And we
reiterate that this favorable demand phase is unlikely to be stopped soon, given the multi-quarter nature of
transformational services work.
For instance, systems integration initiatives (e.g., ERP software deployment) at large companies often take
over a year, and stoppages of such initiatives midstream generally do not occur, unless very negative
circumstances hit close to home. In other words, we see ingredients in place for this transformational phase
of demand to last multiple quarters (e.g., more than one year), partly due to substantial work that didn't get
done during the 2-year financial crisis (i.e., reflecting pent-up demand). Also, we underscore that large
companies generally cannot implement systems and/or transform business processes in less than 6 months
(i.e., often requires 1 or more years).
Moreover, as conveyed in our earlier research on the strategy consulting market, we think 2011's uptick in
systems integration initiatives is supported by a huge amount of planning work that has already been
completed over the past year.
Less economic risk than perceived
While investors are prone to have substantial worries about macro issues (e.g., issues in Japan, concerns
about Middle East/Northern Africa), we contend that Accenture's growth can be resilient in the face of these
issues and in scenarios involving slower GDP growth. We underscore our ongoing view that the primary
risk to systems integration demand is a major macro-shock to clients' decision making, while periods of
poor GDP growth (if it occurs without people being shocked by it) should not cause major problems for the
demand of top consulting / systems integration businesses. On a related note, despite the issues in Japan
and Middle East/Northern Africa, we are comfortable that Accenture's upwardly revised FY11 guidance can
still prove to be conservative.
Accenture's distinctive attributes vs. tech stocks and the Tech Titans
We reiterate that, compared to other tech stocks (as shown in Exhibits 3& 4), Accenture has distinctive
attributes, that are not fully appreciated by investors. These attributes of Accenture include: late-cycledemand
traits (i.e., we reiterate Accenture is in the sweet spot of demand cycle); GARP profile; aboveaverage
revenue and EPS growth; growth resiliency that we maintain is much better than most tech stocks
given our research showing Accenture's growth is not as wed to GDP as is commonly perceived; wayabove-
average ROC; FCF that is consistently better than earnings; and substantial room to give more cash
back to shareholders.
Note that Exhibits 3& 4 provide updates to the tech stocks' metrics analysis that we featured in our January
12th research piece, which placed Accenture on Bernstein's best idea list.
Evaluating Accenture against "Tech Titans" with high FCF yields:
In Exhibit 3, we've compared Accenture against a group of seven high-FCF-yielding stocks that we're
calling the Tech Titans (largely enterprise technology businesses). Unlike certain high-FCF-yielding stocks
that have had languishing stock performance, Accenture's stock has performed well, and we see good
prospects for further performance by Accenture. Moreover, compared to the Tech Titans, Accenture has
above-average revenue growth, EPS growth, and ROC (return on capital):
Consensus revenue growth estimates for Accenture are 13.2% and 8.9% in CY11 and CY12, greater than
the means (excluding Dell) of 8.6% and 7.1% in CY11 and CY12, respectively, for the Tech Titans.
Also note that we're forecasting above-consensus revenue growth of 16.3% (in US dollar terms) for
Accenture in CY11.
Consensus EPS growth estimates for Accenture in CY11 and CY12 are 19.5% and 12.7%, greater than
the means (excluding Dell) of 8.4% and 11.2% in CY11 and CY12, respectively, for the Tech Titans. In
fact, Accenture has a better CY11 EPS growth outlook than all of the Tech Titans in Exhibit 3. Also note
that we're forecasting above-consensus EPS growth of 23.3% for Accenture in CY11.
Accenture's ROC is 52.0% (on a LTM basis), compared to the mean (excluding Dell) of 18.0% for the
seven Tech Titans. Accenture's ROC is the highest among the Tech Titans.
Evaluating Accenture against a broader group of tech stocks with high FCF yields:
In the same fashion in Exhibit 4, we've compared Accenture against a broader group of 16 high-FCFyielding
tech stocks. Compared to these 16 stocks, Accenture has above-average revenue growth, EPS
growth, and ROC (return on capital):
Consensus revenue growth estimates for Accenture in CY11 and CY12 are 13.2% and 8.9%, greater than
the medians of 8.2% and 6.0% in CY11 and CY12, respectively, for the 16 large-cap technology
companies with high FCF yield. Also note that we're forecasting above-consensus revenue growth of
16.3% for Accenture in CY11.
Consensus EPS growth estimates for Accenture in CY11 and CY12 are 19.5% and 12.7%, compared to
the medians of 12.7% and 10.5% in CY11 and CY12, respectively, for these 16 large-cap technology
companies. Also, we're forecasting above-consensus EPS growth of 23.3% for Accenture in CY11.
Accenture's ROC is 52.0% (on a LTM basis), compared to the median of 10.3% for the 16 large-cap
technology companies with high FCF yields.
Comparing Accenture's FCF-based valuation to the Tech Titans:
Due to these distinctive growth and ROC attributes, we argued in our January 12th research piece that
Accenture's valuation deserved a materially above-average FCF multiple (see this prior research –
Accenture, Cognizant, Infosys: Seeing Bullish Demand Progression; ACN Top Idea; Raising ACN,
INFY, CTSH Targets). And, we argued in this piece that Accenture was very attractively valued and that
our $57 target price was conservative. At that time, Accenture was trading at an EV/FCF multiple of only
11.1, which was only modestly higher than the then Tech Titan mean (excluding Dell) of 10.9.
Alternatively stated, despite having above-average growth and ROC, Accenture's FCF/EV yield was 9.0%,
which was only modestly lower than the Tech Titan mean (excluding Dell) of 9.2%.
Over the last couple of months, Accenture stock has rallied. Still, we believe Accenture's stock is
reasonably attractive despite the stock getting more credit today for its distinctive attributes, particularly its
growth that is exceeding the Street's prior expectations. Accenture is now trading at an EV/FCF multiple of
12.4, which is higher than the Tech Titan mean (excluding Dell) of 9.9. Alternatively stated, Accenture's
FCF/EV yield is 8.1%, which is lower than the Tech Titan mean (excluding Dell) of 10.1%.
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