Summary
- Financial Services and Health & Public Services verticals continue to shine at Accenture, being main contributors to double-digit growth.
- CMT (Communications, Media, and Technology) CMT also generates mid-teens growth, mainly driven by engagements from Media firms.
- Resources and Consumer are lagging at low-single-digit growth, though Consumer segment should improve in 2020.
Basic Business / Product Analysis:
Accenture is an IT Services company that provides services in strategy, consulting, digital, technology, and operations segments. The company has a revenue base of about $40 billion, with more than 470,000 employees] serving clients in more than 200 cities in 120 countries. ACN focuses on an "as-a-service" model of service delivery, which includes business process outsourcing, cloud services, managed operations, security, and infrastructure services. Accenture works with more than 90 clients out total 100 current clients of the Fortune Global, though in recent years the company has been reaching out to smaller and “niche”-focused clients.
Valuation:
Per our industry-wide analysis and Accenture’s favorable fundamentals, and given the company’s strong top-line growth, we believe that ACN shares merit ~29x P/E multiple on 2019 earnings. When we apply it to our 2019 EPS estimate of $8.49, we get the target price of $246. We note that this P/E multiple is contingent on the S&P multiple of ~18x, and may expand/contract together with the multiple.
What to Expect from ACN's Report:
Accenture will report quarterly earnings in December in what will mark a remarkable calendar year 2019, when core industry trends came to fruition, despite fears of recession that were prevalent early in the year. Out of the company’s five verticals (discussed in detail below), we see Financial Services, CMT and Health & Public Services all posting double-digit growth. Resources and Consumer, meanwhile should grow in single digits, but remain positive nonetheless. Overall, Accenture remains on firm footing, representing approximately 3%-3.5% of total market share in the IT Services space, capable of approximately $500-$1 billion in annual acquisitions, as well as capital return in the 1-2% range. We reiterate our firm Buy conviction in ACN shares.
Financial Services: We long maintained that Accenture’s Financial Services vertical is mainly about bulge bracket firms and various next-gen technology initiatives these clients sign up for. While money management and insurance firms cumulatively make up about 40% of the top line, banks are still at more than half. We note that 13%-14% Y/Y growth should be sustainable in the fourth quarter, largely driven by 1) traditional IT Services work; 2) cloud and mobile initiatives; and 3) business process outsourcing. We note that within Financial Services vertical margins are also better for banks than they are for insurance or money management players. While we expect an average bulge-bracket player to continue retaining about 6-8 IT Services vendors (in other words, Accenture is likely competing with companies, like IBM, Cognizant, and Capgemini), we still believe that most projects remained intact for ACN in the fourth quarter, positioning it well for 2020.
CMT (Communications, Media, and Technology): Media sub-segment continues to outperform everyone else in this vertical, contributing as much as 18% Y/Y revenue growth during the quarter and easily offsetting any pressure points that communications and technology clients likely posed. We estimate that CMT grew about 16% during the quarter, with cloud projects remaining key to this traction. It is our understanding that cost-wise there may be incremental SG&A expenses around in-house technology work, but we expect them to be offset by Health & Public Service vertical.
Health & Public Services: Within healthcare side, we see growth around 11% Y/Y, driven about equally by pharmaceutical and payer engagements, albeit patent cliff may somewhat kick in during 2020 and be a negative headwind for pharma; we expect more update on this during the call. Within Public Services, we don’t anticipate any new contracts or incremental work for existing contracts: we believe that growth has been fairly steady in low-mid teens for this sub-segment. Much has been rumored about Pentagon’s recent contract to Microsoft: whether or not Accenture could be an indirect beneficiary on the IT side. Should that materialize, it will not happen until 2021-22, but we should not speculate at this point.
