A first look at Accenture; Happy birthday, Susan!
Shares of consulting giant Accenture (ACN) jumped 15.8% on Thursday after the company reported solid fourth-quarter earnings...
Revenue of $18.7 billion was up 7% year over year, beating estimates of $18 billion. And earnings per share ("EPS") of $3.29 surpassed expectations of $3.18.
For the year, the company generated a robust $11.6 billion in free cash flow ("FCF"). It returned $11.5 billion to shareholders via $4 billion in dividends (the stock currently yields 3.4%) and $7.5 billion in share repurchases. This reduced the share count by 2.5%.
Importantly, the company gave strong guidance for fiscal year 2027, summarized in this slide from the earnings presentation:
I last wrote about Accenture on June 22, after it reported third-quarter earnings and the stock tumbled 18% to a nine-year low. I concluded:
Accenture generates a ton of free cash flow, has a net cash position, pays a 5.1% dividend, and trades at 9.2 times this year's estimates. This is another one worth a closer look.
The stock has rallied around 60% since then, as you can see in this chart:
It would have been nice to catch the stock at its lows, but it's still down by more than 50% from its all-time high. It's important not to fall into the "I missed it" trap.
Now let's take a look at Accenture's historical financials and valuation...
Revenue and operating income have grown at annual rates of 6.9% and 8%, respectively, over the past two decades:
Accenture's pretax operating margin has risen steadily, boosting profits even faster than revenues:
The business has almost no capital expenditures ("capex"), so FCF is roughly equal to operating income:
Accenture uses its FCF in a number of different ways – a steadily rising dividend, large share repurchases (especially in the past year), and lots of acquisitions:
Repurchases have reduced the share count by 28.5% over the past 20 years, or 1.7% annually – and the company forecasts a 3% reduction in fiscal 2027:
Historically, Accenture has balanced its cash outflows to be roughly in line with FCF, thereby maintaining a healthy net cash balance.
But last year, it paid out $4 billion in dividends, bought back $7.5 billion in stock, and spent $4.9 billion on acquisitions. That total far exceeded FCF of $11.6 billion, so $3.3 billion of net cash turned into $559 million of net debt – still a very low number:
Overall, this is a very strong historical performance. And guidance for next year is solid, which has largely put to rest the "AI eats IT services" narrative, at least for now.
Keep in mind, however, that 3% to 6% revenue growth guidance assumes 2% to 2.5% growth from acquisitions. So management is projecting organic growth to be only around 2.3% (though it may be sandbagging this a bit).
With modest margin expansion and share buybacks reducing the share count by 3%, this should result in mid- to high-single-digit EPS growth.
As for valuation, at the midpoint of management's 2027 adjusted EPS guidance of $14.60, the stock is trading at a mere 13.6 times forward earnings today.
That's higher than the all-time low of 8.7 times it reached a few months ago, but well below the long-term average of 20.1 times, as you can see in this chart:
In summary, I think the stock is undervalued and will likely outperform the market going forward.
My team and I at Stansberry's Investment Advisory will take a deeper dive. If we decide Accenture is our absolute best stock idea, our subscribers, as always, will be the first to know. You can become one by clicking here.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.
P.P.S. We celebrated my wife Susan's ("first annual") 59th birthday on Saturday with brunch at the apartment our two younger daughters share. Here's a picture of us, her parents, her brother, our three daughters, and two of their boyfriends:
