Accenture stock: activity appears to have peaked (NYSE:ACN)

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Investment thesis

We believe that Accenture (New York Stock Exchange: ACN) peaked in terms of its booking and headcount growth, indicating a deceleration in its growth prospects. Although the stock price has started to price this in, valuations look too expensive given the macroeconomic context pointing to a drop in the demand for advice. We price stocks as a sell.

quick primer

Accenture is a global professional services company employing over 710,000 people, and its core businesses are consulting and outsourcing (with a 54%/46% split in Q3 FY8/2022). The key geographic market is North America which accounts for approximately 50% of total sales, followed by Europe with approximately 33%. It is active in most sectors, with the largest exposure in consumer goods, retail and travel services (referred to as “Commodities”), followed by financial services.

Key financial data with consensus estimates

Key financial data with consensus estimates

Key financial data with consensus estimates (Enterprise, Refinitiv)

Breakdown of sales by industry group, Q3 FY8/2022

Breakdown of sales by industry group - Q3 FY8/2022

Breakdown of sales by industry group – Q3 FY8/2022 (Company)

Our goals

We note that Accenture shares recently peaked in December 2021, and at the same time the company announced bookings for the first quarter of fiscal year 8/2022 which exceeded management’s expectations. With bookings being a key indicator of future growth, we want to assess 1) the current outlook for bookings and 2) its staff utilization rate which is a marker of business activity. We will take each in turn.

Bookings seem to have peaked

The company recorded record bookings (orders) in the first quarter of FY8/2022 of $16.8 billion, up 30% year-on-year. This trend repeated in Q2 FY8/2022 where bookings reached USD 19.6 billion, growing 22% YoY. The Q2 book-to-bill ratio (the fraction of orders over sales for the period) reached 1.3x, which is a historically high level for Accenture.

Earnings visibility fell quarter-over-quarter in Q3 FY8/2022, with the company generating $17.0 billion in bookings, a neutral order-to-bill ratio of 1.0x and showing growth slowing to 10% year-on-year. While not a major downside, it does show that the strength seen earlier in the year was not a lasting trend.

While the company does not detail where bookings are generated by industry group, our concern stems from Accenture’s heavy exposure to consumer sectors which account for 28% of sales. While secular tailwinds such as digital transformation and ESG are positive for driving client demand, management comments “consumer goods companies have been very focused on cost as well as growth‘ (page 9) is worth reviewing.

Technology investment and consulting demand can be driven by many factors ranging from business transformation to regulatory requirements, but it is essentially spending to generate higher business returns. In the current macroeconomic environment where businesses and consumers are experiencing significant cost inflation, the priority to devote to new and large discretionary projects will come under greater scrutiny, resulting in lower bookings via cancellations or delays. . We believe this will be most pronounced in consumer-facing sectors such as consumer staples, travel and retail.

While there is no definitive indication of a slowdown in demand, we note that product sales in Q3 FY8/2022 increased 31% year-on-year, a slight decline from the growth seen in Q2 (+34% YoY) and Q1 (+34% YoY). We believe this is a sign of weakness to come.

Area of ​​use

A consulting business generates revenue through the following means: high utilization, increased prices (billing rate), and increased headcount. Accenture has experienced high employee utilization rates since the first quarter of FY8/2021 at 94%, which fell to 91% in the third quarter of FY8/2022.

Employee utilization rate quarterly trend

Employee utilization rate quarterly trend

Employee utilization rate quarterly trend (Company)

Demand has been high meaning headcount grew 25% YoY in Q3 FY8/2022. It seems that there are no more measures to increase human resources further and voluntary attrition rates are increasing, which means that management is doing less to keep people.

Number of employees

Number of employees

Number of employees (Company)

Management says 91% is the usage area that they like to be in (page 14) – this is unlikely given that no comments have been made about the high utilization rates before. Lower utilization rates combined with lower headcount will mean (at the very least) lower growth expectations going forward. Consensus estimates seem to be aware of this, with revenue growth expected to slow in FY8/2023.

We believe that the decline in utilization and the flattening of the workforce are signs of slowing growth.

Ratings

Accenture shares are trading on a FY8/2023 PER (on reported adjusted EPS) of 26.6x and a free cash flow yield of 4.7%, based on consensus estimates. While these ratings don’t seem overly demanding, they don’t indicate a major understatement either.

Accenture is a high quality company, but not easily scalable because growth is tied to recruitment and the resulting fixed costs. Operating margins are at an all time high, but other tech companies are generating much higher returns. At this time, where the demand outlook may be softening, the risk-reward profile is not so attractive and the prospective dividend yield at 1.3% is not high enough to justify staying.

Risks

The upside risk comes from a major escalation in bookings growth, driven by customers making major investments in business transformation. This could happen due to a disruptive environment caused by the war in Ukraine and cost inflation, such as in the natural resources sector.

The company is well capitalized with net cash and hence shareholder returns could be improved which could attract investors. This could take the form of a major share buyback.

Downside risk stems from a continued deceleration in year-over-year bookings growth, followed by signs that labor is becoming less utilized.

A major weakening of the USD will be negative as half of total sales come from overseas markets, while having a local currency cost base.

Conclusion

Accenture has been riding the wave of post-pandemic business transformation happening globally, not least because of spending in consumer-related markets. With the massive shift in the global economic outlook, we believe that old pockets of growth will weaken and other sectors such as utilities and financials will begin to scale back. In this context and given the valuations, we do not believe that equities are attractive. We price stocks as a sell.

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