EUR 850.00 For Business Accounts Only

Morningstar | Consistency Rules as Accenture Reports Good 3Q, Leads in Digital; Shares at Premium

Accenture’s third-quarter performance was like clockwork. The quarter reflected the firm’s ability to post consistently strong results across the revenue and margin lines, with revenue at the top end of management's guidance and margins up 20 basis points year over year to 15.5%. The performance reflects Accenture's advantageous competitive position in the market and our belief that the company is leading the way in terms of digital transformation services across the IT services industry. Notably, Accenture’s "new" services (otherwise known as digital, cloud, and security services) grew in the strong double-digit range, consistent with recent performance, and constituted over 60% of total revenue.

With Accenture performing well, management raised its fiscal 2019 outlook. We had been forecasting a strong yearly performance anyway, so the raised outlook has little bearing on our unchanged $148 fair value estimate or wide economic moat rating. While we think Accenture deserves a pricing premium versus peers given its strong competitive position and positive outlook, we think the current valuation is a little too rich, and we’d hesitate to commit new capital to the name at this time.

For the quarter, reported revenue increased 4% year over year to $11.1 billion (8.4% in constant currency). Growth markets was the highest-growth region (in local currency), up 13% year over year and in line with expectations. North America performed well, growing 9%, and Europe was the laggard, growing 5%.

As we’ve seen with other IT services peers like Cognizant, Accenture’s financial services performance was weak across its operating groups and continues to reflect challenges in that market for large incumbent financial services providers that are being digitally disrupted. We don’t expect to see a quick turnaround in this business, but fortunately for Accenture, its broad diversification will help to limit its exposure. Positively for the firm, resources, products, and communications, media, and technology performed well, and we expect this continue.

Accenture’s operating margin expanded 20 basis points year over year to 15.5%. The margin expansion was within our forecast, and we think the company will be able to consistently expand its operating margin by 10-30 basis points year over year over our explicit forecast period. We see offshore leverage, automation, and higher-value digital services as drivers of this margin performance.