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Accenture plc Overweight
ACN, ACN US
Takeaways from Analyst Day - Upbeat Tone, In-Line
Outlook
ACN held its investor conference today in NYC, which was very well attended
and included upbeat presentations from management and various business heads.
Key takeaway was that Accenture is well positioned to outperform the industry,
and we remain confident that ACN has made the right investments to take
advantage of several early-stage secular trends (e.g., globalization, mobility,
regulation, cloud) to fuel sustainable premium growth. ACN prudently guided
FY12 revenue growth at 7-10% and EPS growth of at least 12% on slight margin
expansion, which was in line with our views, but perhaps short of some bullish
expectations of a double-digit guide. We reiterate our Overweight rating on ACN
and believe the stock is set up well for potential positive earnings revisions over
the mid-term.
• In-line FY12 revenue growth guidance. FY12 local currency revenue
guidance of 7-10% (vs. our est. of 8.5% growth) compares with overall 5%
industry growth in FY12. ACN highlighted various near-term demand drivers
such as globalization (resulting in consolidation in client industries), regulation
compliance, clients looking for operational excellence (driving process reengineering
and application rationalization work), and innovation. The
company is also seeing growth from new technology trends such as cloud,
mobility, data analytics, and smart-grid. In terms of verticals, the company is
investing in healthcare, consumer goods, banking, telecom, and utilities.
• EPS guidance also in line, helped by slight margin expansion and buybacks.
The company guided for FY12 EPS growth of at least 12% (vs. our estimate of
13%). Accenture expects slight margin expansion (JPMe 9bps in FY12) driven
by improving productivity, delivery efficiency, and industrialization. ACN also
committed to returning $2.8B+ in cash to shareholders in FY12 in form of
dividends and buybacks (vs. our estimate of $2.7B). ACN also expects to lower
its share count by 2-3% through buybacks. Management also reiterated its
acquisition strategy of pursuing tactical tuck-in deals.
• We didn’t get the GDN disclosure we were hoping for, but the asset is
impressive. ACN did not detail its GDN revenue/margin profile, but expects
continued mix shift towards GDN (at 57% now) as the company believes it can
handle more work out of the GDN than we appreciated. Increasing mix implies
continued revenue headwinds, but at a decreasing rate in our view, and yields a
more competitive offering (in terms of pricing and delivery) with a focus on
productivity. We continue to believe GDN mix shift does not result in huge margin
tailwinds for the company, but should be nicely accretive over time. See our note
“Accenture: Deep Dive on Offshore Mix Shift” dated 04/13 for more details on
GDN impact on the company’s financials.
• Cloud. ACN believes cloud represents a $50B addressable market and its cloudbased
pipeline runs into multi-billion dollars. The company helps its clients
integrate and implement cloud-based services and we believe is also investing in
developing its own SaaS-based solutions. The CTO was very confident that cloud
represents a solidly accretive revenue opportunity for Accenture.
• Management consulting headcount coming back to pre-recession levels. ACN
increased its management consulting headcount from 13k last year to 16k this year
(including ~1,000 at low-cost locations). The company also believes (and we
agree) its technology capabilities, along with its deep industry expertise and global
reach, help it differentiate from competitors.
Valuation
Price Target Methodology
Emphasizing the E over the Multiple
Our price target methodology emphasizes our CY12 EPS estimates as the primary
driver of our relative valuation analysis as the bulk of our coverage stocks are valued
on P/E. NTM P/E multiples have been volatile in recent months. We acknowledge
the difficulty in pinpointing the multiple in such volatile times, which is why we are
prioritizing “getting the E right,” while being conservatively prudent in selecting a
multiple based on historical and relative valuation measures. We also consider other
implied valuation metrics to support our target to account for variances in business
models and differences in sensitivity to cyclical, competitive, and secular changes.
Specifically, we also consider EV/EBITDA and FCF yields when assessing
valuation.
• Our latest view on CAGR in EPS for 2010-2013E and implied PEG. To arrive
at our price target, we consider our 2010-2013E CAGR in EPS, and generally
assume a PEG of about 1.2x for the IT Services group, but adjusting for
company-specific factors for each stock.
• Staying within historical multiple ranges. Given uncertainty in the macro, our
target multiple tries to stay within recent multiple ranges since 2008.
• Rolling CY11E P/E. Our implied target multiple (on CY12E EPS) generally
does not imply any material change from the P/E multiple calculated against our
CY11E EPS. Any difference in our target multiple from the current multiple can
generally be explained by our view that a premium or discount is warranted given
where the stock has traded historically relative to its peers or other factors like
changes in leverage, FX, client risk, or particulars in the specific end market that
drive company-specific growth/margins.
Price Target
Our ACN price target of $63 applies a 16.5x multiple to our CY12E EPS of $3.84.
ACN is currently trading at 16x our CY11E EPS while peers are trading at 19x. Over
the last year, ACN has traded at a -15% discount relative to its peers on NTM P/E.
We estimate ACN earnings will grow at 14.6% over the next three years (2009-12)
and our price target implies a 9.8% premium to the earnings CAGR.
Risks to Rating and Price Target
We see four key risks to our Overweight rating:
• A deteriorating IT spending environment could reduce demand for ACN’s
services.
• Competitive pricing potentially exacerbated by offshore outsourcing trend could
pressure margins.
• Major outsourcing contracts could perform below expectations, adversely
impacting results or sentiment.
• The ability to attract, retain, and motivate talent could fall short, adversely
impacting client satisfaction and results.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Accenture plc Overweight
ACN, ACN US
Takeaways from Analyst Day - Upbeat Tone, In-Line
Outlook
ACN held its investor conference today in NYC, which was very well attended
and included upbeat presentations from management and various business heads.
Key takeaway was that Accenture is well positioned to outperform the industry,
and we remain confident that ACN has made the right investments to take
advantage of several early-stage secular trends (e.g., globalization, mobility,
regulation, cloud) to fuel sustainable premium growth. ACN prudently guided
FY12 revenue growth at 7-10% and EPS growth of at least 12% on slight margin
expansion, which was in line with our views, but perhaps short of some bullish
expectations of a double-digit guide. We reiterate our Overweight rating on ACN
and believe the stock is set up well for potential positive earnings revisions over
the mid-term.
• In-line FY12 revenue growth guidance. FY12 local currency revenue
guidance of 7-10% (vs. our est. of 8.5% growth) compares with overall 5%
industry growth in FY12. ACN highlighted various near-term demand drivers
such as globalization (resulting in consolidation in client industries), regulation
compliance, clients looking for operational excellence (driving process reengineering
and application rationalization work), and innovation. The
company is also seeing growth from new technology trends such as cloud,
mobility, data analytics, and smart-grid. In terms of verticals, the company is
investing in healthcare, consumer goods, banking, telecom, and utilities.
• EPS guidance also in line, helped by slight margin expansion and buybacks.
The company guided for FY12 EPS growth of at least 12% (vs. our estimate of
13%). Accenture expects slight margin expansion (JPMe 9bps in FY12) driven
by improving productivity, delivery efficiency, and industrialization. ACN also
committed to returning $2.8B+ in cash to shareholders in FY12 in form of
dividends and buybacks (vs. our estimate of $2.7B). ACN also expects to lower
its share count by 2-3% through buybacks. Management also reiterated its
acquisition strategy of pursuing tactical tuck-in deals.
• We didn’t get the GDN disclosure we were hoping for, but the asset is
impressive. ACN did not detail its GDN revenue/margin profile, but expects
continued mix shift towards GDN (at 57% now) as the company believes it can
handle more work out of the GDN than we appreciated. Increasing mix implies
continued revenue headwinds, but at a decreasing rate in our view, and yields a
more competitive offering (in terms of pricing and delivery) with a focus on
productivity. We continue to believe GDN mix shift does not result in huge margin
tailwinds for the company, but should be nicely accretive over time. See our note
“Accenture: Deep Dive on Offshore Mix Shift” dated 04/13 for more details on
GDN impact on the company’s financials.
• Cloud. ACN believes cloud represents a $50B addressable market and its cloudbased
pipeline runs into multi-billion dollars. The company helps its clients
integrate and implement cloud-based services and we believe is also investing in
developing its own SaaS-based solutions. The CTO was very confident that cloud
represents a solidly accretive revenue opportunity for Accenture.
• Management consulting headcount coming back to pre-recession levels. ACN
increased its management consulting headcount from 13k last year to 16k this year
(including ~1,000 at low-cost locations). The company also believes (and we
agree) its technology capabilities, along with its deep industry expertise and global
reach, help it differentiate from competitors.
Valuation
Price Target Methodology
Emphasizing the E over the Multiple
Our price target methodology emphasizes our CY12 EPS estimates as the primary
driver of our relative valuation analysis as the bulk of our coverage stocks are valued
on P/E. NTM P/E multiples have been volatile in recent months. We acknowledge
the difficulty in pinpointing the multiple in such volatile times, which is why we are
prioritizing “getting the E right,” while being conservatively prudent in selecting a
multiple based on historical and relative valuation measures. We also consider other
implied valuation metrics to support our target to account for variances in business
models and differences in sensitivity to cyclical, competitive, and secular changes.
Specifically, we also consider EV/EBITDA and FCF yields when assessing
valuation.
• Our latest view on CAGR in EPS for 2010-2013E and implied PEG. To arrive
at our price target, we consider our 2010-2013E CAGR in EPS, and generally
assume a PEG of about 1.2x for the IT Services group, but adjusting for
company-specific factors for each stock.
• Staying within historical multiple ranges. Given uncertainty in the macro, our
target multiple tries to stay within recent multiple ranges since 2008.
• Rolling CY11E P/E. Our implied target multiple (on CY12E EPS) generally
does not imply any material change from the P/E multiple calculated against our
CY11E EPS. Any difference in our target multiple from the current multiple can
generally be explained by our view that a premium or discount is warranted given
where the stock has traded historically relative to its peers or other factors like
changes in leverage, FX, client risk, or particulars in the specific end market that
drive company-specific growth/margins.
Price Target
Our ACN price target of $63 applies a 16.5x multiple to our CY12E EPS of $3.84.
ACN is currently trading at 16x our CY11E EPS while peers are trading at 19x. Over
the last year, ACN has traded at a -15% discount relative to its peers on NTM P/E.
We estimate ACN earnings will grow at 14.6% over the next three years (2009-12)
and our price target implies a 9.8% premium to the earnings CAGR.
Risks to Rating and Price Target
We see four key risks to our Overweight rating:
• A deteriorating IT spending environment could reduce demand for ACN’s
services.
• Competitive pricing potentially exacerbated by offshore outsourcing trend could
pressure margins.
• Major outsourcing contracts could perform below expectations, adversely
impacting results or sentiment.
• The ability to attract, retain, and motivate talent could fall short, adversely
impacting client satisfaction and results.
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