Tougher Times Ahead: Accenture’s Proactive Approach To Economic Challenges
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Summary:
- Accenture benefits from a powerful brand, strong client relationships, and a comprehensive service portfolio, positioning it as a leader in the consulting and outsourcing industry.
- The company’s recent layoff announcement signals a proactive approach to addressing potential economic challenges through streamlining operations, transforming non-billable corporate functions, and consolidating office space.
- Accenture’s strong financial track record and commitment to shareholder value are underpinned by a solid balance sheet, reliable dividends, and ongoing stock repurchase programs.
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Accenture (NYSE:ACN), a global leader in consulting and outsourcing services, has established itself as a high-quality business with multiple competitive advantages and growth opportunities. In this article, we will explore Accenture’s key strengths, the company’s recent layoff announcement and preparations for challenging economic times, and its financial position and valuation. Our investment thesis revolves around Accenture’s ability to capitalize on recent regulatory changes and new technologies while also proactively addressing potential economic challenges, ultimately ensuring long-term success and stability in an uncertain landscape. All things considered, we remain neutral on ACN shares.
Business Overview
Our comprehensive analysis of Accenture highlights the company’s strong position as a global leader in consulting and outsourcing services. With around 738,000 employees in over 50 countries and a presence in numerous industries, Accenture has established itself as a high-quality business with multiple competitive advantages and growth opportunities.
One of Accenture’s key strengths is its powerful brand and strong client relationships, which we believe provides the company with a significant competitive advantage. The efforts of offshore IT companies to establish a greater presence in consulting and systems integration further validate Accenture’s market approach and solidify its position as the largest independent consultant in the world.
The company’s ability to provide end-to-end IT services for its clients, ranging from consulting to systems integration to application and system maintenance, offers a distinct advantage over competitors with less diverse offerings. This comprehensive service portfolio ensures that Accenture remains a preferred choice for clients seeking a one-stop solution for their IT needs.
Accenture is well-positioned to capitalize on the opportunities arising from recent regulatory changes (such as Dodd-Frank and Healthcare reform) and new technologies (including cloud computing, social media, and virtualization). These developments necessitate significant investments from clients and generate substantial consulting, systems integration, and application development/maintenance work. We believe that the ongoing evolution of regulation and technology will provide a tailwind to offshore IT growth in the coming years, further bolstering Accenture’s prospects.
Moreover, the company stands to benefit from the secular shift to outsourcing and offshoring, as clients increasingly seek cost reduction by moving work to locations like India. We estimate that this strategy can generate cost savings of 30-70%, making it an attractive proposition for businesses. Accenture’s Global Delivery Network is well-equipped to capitalize on this “mega” trend, providing cost efficiencies and enhanced flexibility to its clients. As a result, we expect Accenture to continue experiencing robust growth in the foreseeable future.
Tougher Times Ahead
We believe that Accenture’s recent layoff announcement signals the company’s anticipation of challenging economic times ahead. In an effort to cut costs and better position itself in a potentially turbulent market, Accenture has announced plans to eliminate 19,000 jobs worldwide, which constitutes 2.5% of its workforce. The company is set to spend $1.2 billion in severance and $300 million in consolidating office space over the next 18 months, with a total estimated cost of $1.5 billion through fiscal year 2024. The majority of the affected roles will be among back-office staff and non-billable corporate functions.
We believe Accenture’s strategy is twofold: streamlining operations and transforming non-billable corporate functions. This approach is aimed at enhancing business optimization and reducing costs for fiscal 2024 and beyond. The company will continue to hire, but with a focus on streamlining its operations, which could lead to increased efficiency and improved competitiveness in the market.
The layoffs are expected to occur in two phases, with nearly half of the 19,000 employees departing by the end of fiscal year 2023, and the remainder leaving in fiscal year 2024. This gradual process will allow Accenture to better manage the transition and minimize potential disruptions to its operations. The company’s decision to consolidate office space further underscores its commitment to cost reduction and long-term financial stability.
The restructuring also affects Accenture’s leadership, with more than 800 of its over 10,000 leaders expected to depart across various markets and services. This shift in management signals a potentially significant change in the company’s direction, which could result in a leaner and more focused organization.
We believe that Accenture’s layoff announcement and preparation for tougher times demonstrate a proactive approach to addressing potential economic challenges. By streamlining operations, transforming non-billable corporate functions, and consolidating office space, the company is taking necessary measures to reduce costs and improve its competitive standing in the market. While the restructuring will have a significant impact on Accenture’s workforce and leadership, it is a strategic move aimed at ensuring long-term success and stability in an increasingly uncertain economic landscape.
Financial & Valuation
Our analysis of Accenture’s financial position reveals a strong track record of returning cash to shareholders, underpinned by a solid balance sheet with approximately $6.6 billion of net cash. The company’s earnings quality is commendable, with free cash flow exceeding EPS consistently over the past two decades. Accenture’s commitment to shareholder value is evidenced by its reliable quarterly dividend of $0.97 per share and its ongoing stock repurchase program, which has led to a 1-5% annual reduction in share count for over a decade.
In recent years, Accenture has experienced robust growth, largely due to its strategic positioning in key growth markets, such as cloud technology. The company also capitalized on the accelerated digital transformation following the COVID-19 pandemic, as businesses increased spending on digital work environments and cybersecurity. This resulted in a 14% revenue growth in FY21, further accelerating to 22% in FY22, reaching $61.6 billion. However, revenue growth is expected to decelerate in FY23 to 4.4%, totaling $64 billion, due to challenging comparatives and a slowing macroeconomic environment. While consensus estimates predict a 6.7% growth in FY24, we are skeptical given Accenture’s sensitivity to macroeconomic factors.
Despite the company’s scaling operations, operating margins have only expanded modestly. In FY23, operating margins are anticipated to be around 15.1%, similar to levels in FY22, FY21, and even a decade ago in FY13. Although management has expressed optimism about margin expansion, we have not observed any significant improvements in Accenture’s cost structure leveraging.
As a result, EPS growth has remained largely in line with revenue growth. In FY23, EPS is projected to increase by 8.3% to $11.60, while FY24 is expected to see 7.6% growth to $12.48. However, we believe that these figures are heavily reliant on revenue growth and could be adversely affected by an economic downturn. In such a scenario, we expect management to potentially reduce headcount to protect margins.
At 24x forward 12-month consensus EPS, Accenture’s current valuation is situated in the middle of its 5-year range. Compared to the S&P 500, the company trades at a 30% premium, which is closer to the lower end of its 5-year range of between 15% and 80%. While the company has demonstrated strong growth and financial stability, we believe that its future prospects are closely tied to macroeconomic trends, which are highly uncertain.
Conclusion
Accenture’s strong position in the consulting and outsourcing services industry, coupled with its proactive approach to addressing potential economic challenges, makes it an attractive investment prospect. However, investors should be aware that the company’s future prospects are closely tied to macroeconomic trends, which are highly uncertain. While Accenture has demonstrated strong growth and financial stability, its recent layoffs and preparations for tougher times signal a cautious approach to the future. Investors should closely monitor the company’s performance and the broader economic landscape to make informed decisions about their investment in Accenture. Given the company’s sensitivity to the highly uncertain macroenvironment, we remain netural on the stock.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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