Morningstar | Accenture Reports Solid 1Q as New Portfolio Continues to Differentiate; Shares Fairly Valued
Accenture reported a solid start to fiscal 2019, continuing to post industry-leading revenue growth versus established peers. This growth, which is outpacing the overall market, is being driven by Accenture's strategically advantageous position in what the company terms its "new" services. These new services, which comprise digital, cloud, and security, have grown to constitute approximately 60% of Accenture’s total revenue, and we see this business continuing to provide the growth differentiation that Accenture has been exemplifying for the past few years. As we discussed in our digitally focused IT services Observer from 2016, we see Accenture’s global delivery network, intellectual property, relationships, and industry expertise as key components of its leading position in cloud and digital workloads. This has proved true, and we believe the firm will remain well positioned for the foreseeable future. After the quarter, we are keeping our $145 fair value estimate unchanged and retaining our wide economic moat rating. With Accenture trading close to our fair value estimate, we’d seek a slightly wider margin of safety before accumulating shares in this gold-standard IT services company.For the fiscal first quarter, revenue grew 7% year over year to $10.6 billion (9.5% in constant currency). Three of Accenture’s five operating groups recorded double-digit revenue growth, although financial services and health and public service remained laggards, growing only 1% and 5%, respectively. Pressure from federal spending and contraction in banking and capital markets were to blame, but Accenture does foresee some improvement in these businesses toward the second half of the fiscal year. Bookings were mostly in line with our expectations, with outsourcing bookings of $4.3 billion (a book/bill of 0.9) and consulting bookings of $5.9 billion (a book/bill of 1.0). We expect bookings to build throughout the year, reflecting the seasonality of activity.
Accenture’s operating margin expanded 20 basis points year over year to 15.4%. The modest 20-basis-point margin expansion was attributed to 10 basis points of savings across both the gross margin line and the general and administrative line. Over the medium term, we forecast yearly margin expansion of 10-30 basis points following historic margin achievement and management’s long-term focus on modest but consistent margin expansion.
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