The IT services giant delivered another solid quarter.
Accenture (ACN 4.74%) posted its third-quarter earnings results on June 23. The IT services giant’s revenue rose 22% year over year (27% in local currency terms) to $16.2 billion, which beat analysts’ expectations by $200 million.
Its net income grew 15% to $1.79 billion, or $2.79 per share, but fell short of the consensus forecast by $0.04 per share. It mainly attributed that miss to a $0.15-per-share impact from the shutdown of its Russian business.
Accenture’s headline numbers looked solid, but its stock barely budged after the report. Should investors pick up some shares of this blue chip tech stock as a defensive play in this turbulent market?
IMAGE SOURCE: GETTY IMAGES.
Another quarter of double-digit sales growth
Accenture serves five main markets: communications, media, and tech (which generated 21% of its third-quarter revenue); financial services (19%); health and public services (18%); products (28%); and resources (13%).
Back in fiscal 2020 (which ended in August of the calendar year), Accenture’s growth cooled off as its clients curbed their IT spending during the onset of the pandemic. But over the past five quarters, the company generated double-digit sales growth as those headwinds waned in a post-lockdown market. Just look at the year-over-year revenue growth in the table below:
| Segment | Q3 2021 | Q4 2021 | Q1 2022 | Q2 2022 | Q3 2022 |
|---|---|---|---|---|---|
| Communications, media, and tech | 19% | 23% | 32% | 32% | 31% |
| Financial services | 16% | 20% | 24% | 25% | 24% |
| Health and public services | 21% | 18% | 23% | 21% | 19% |
| Products | 17% | 25% | 34% | 34% | 31% |
| Resources | 3% | 13% | 17% | 25% | 26% |
| Total | 16% | 21% | 27% | 28% | 27% |
DATA SOURCE: ACCENTURE. LOCAL CURRENCY TERMS.
During the conference call, CEO Julie Sweet said Accenture’s long-term growth will be driven by “five forces that our clients must harness over the next decade” — namely, “total enterprise reinvention, talent, sustainability, the Metaverse continuum, and the ongoing tech revolution.”
Sweet mainly attributed Accenture’s recent growth to two of those forces: total enterprise reinvention, which revolves around digitally transforming “every part of every business” for operating efficiency; and talent, in which it helps companies hire and nurture new employees. Sweet noted that going forward, the “common theme” for Accenture’s business was that its clients will turn to its services to “effectively use technology to achieve their goals.”
Accenture expects that momentum to continue through the end of the year. That’s why it raised its full-year revenue guidance, in local currency terms, from 24%-26% growth to 25.5%-26.5% growth. In U.S. dollar terms, it expects currency headwinds to reduce its reported growth by about 4.5%.
Expanding margin and robust earnings growth
Accenture’s operating margin expanded both year over year and sequentially to 16.1% during the third quarter. Its earnings per share (EPS) have also increased by double digits for five consecutive quarters.
| Metric | Q3 2021 | Q4 2021 | Q1 2022 | Q2 2022 | Q3 2022 |
|---|---|---|---|---|---|
| Operating margin | 16% | 14.6% | 16.3% | 13.7% | 16.1% |
| EPS growth (YOY) | 26% | 29% | 28% | 25% | 16% |
DATA SOURCE: ACCENTURE. YOY = YEAR OVER YEAR.
For the full year, Accenture expects its operating margin to rise 10 basis points to 15.2%, even as it ramps up its investments in a post-lockdown market. It expects its EPS to increase 21%-22%, even after absorbing a $0.14 impact from the aforementioned currency headwinds. That range was slightly reduced from its previous forecast for 21%-23% growth.
Accenture also reiterated its prior guidance for generating $8 billion-$8.5 billion in free cash flow (FCF) for the full year, compared to $8.1 billion in fiscal 2021, as well as its plans to return at least $6.5 billion of that cash to its investors via buybacks and dividends. It currently pays a forward dividend yield of 1.4%.
It looks like a great buy right now
I’ve previously praised Accenture as a rock-solid company — but I’ve also warned that its higher valuation would limit its upside potential. However, its stock has already stumbled about 30% this year amid the broader tech sell-off, and it now looks a lot cheaper at 27 times this year’s earnings.
By comparison, Accenture’s smaller rival Globant (GLOB 3.22%), which is growing slightly faster, trades at 65 times forward earnings. SAP (SAP 4.42%), which is growing much slower than Globant and Accenture, has a forward price-to-earnings ratio of 18. Therefore, Accenture now looks reasonably valued relative to its industry peers and its own near-term growth rates.
Accenture isn’t an exciting hypergrowth stock, but it generates stable revenue, earnings, and FCF growth while trading at an attractive valuation. Those qualities make it a great stock to own as rising rates rattle the market.
