In a market where plenty of uncertainty is ahead of us, defensive stocks are a great way to generate potential returns with reduced risks. Accenture (ACN), a global leading consulting and outsourcing company with a diversified business model, is well positioned to ride out market downturns, and has plenty rooms to grow.
Accenture is diversified both geographically and industrially. Its business consists of 5 operating groups which cover 19 industry groups, and the company offers both consulting and outsourcing services within these groups. The chart below shows revenue generated each year by each individual operating group. We see that despite the moderate revenue decline during the last recession, all groups have had sustained growths over a long period of time. We also see that Accenture’s operations are spread quite evenly among its operating groups. This diversified business portfolio has greatly reduced the company’s overall risks. As evidenced in 2010, the revenue decline in Communications, Media & Technology and Health & Public Service was offset by gains in Financial Services, Products, and Resources.
What’s more impressive about Accenture is that since 2004, four out of five operating groups had double digit compound annual growth in revenue (data shown in table below).
We like Accenture’s continuous rewards to its shareholders. Since its 2001 IPO, the company has returned 90% of free cash flow to shareholders, including $3.4 billion in dividend payments and almost $21 billion in the form of share buybacks. Over the same period, Accenture has had an average of 3% annual reduction in shares outstanding.
Accenture is able to keep growing while consistently returning cash to shareholder due to its great business model. Accenture’s business is non-capital intensive; its growth relies on intellectual capital and human resources. Therefore, the company does not have the need to reinvest a major portion its cash flow for growth. We like the fact that Accenture is focused on its core business, and returning cash back to shareholders instead of taking risks and expanding into capital intensive businesses. This focused approach had helped Accenture maintain its high return on capital (55.3% for 3Q2012) and return on equity (63.7% for 3Q2012). Accenture continues to expand its work force, and expects to hire a total of 60,000 in 2012. The company’s global headcount increased 12% YoY, from 223,000 at the end of 3Q2011 to 249,000 at the end of 3Q2012. Furthermore, headcount in the Global Delivery Network has increased 18% over the same period, from 130,000 to 154,000. Accenture continues to rapidly expand its Global Delivery Network and outsourcing operations, which is evidenced by consistently higher headcount growth in Global Delivery Network compared to overall headcount growth since 2005. This aggressive growth has helped the company become better positioned than many of its competitors and offer lower prices to win over clients. For 3Q2012, outsourcing represented 45% of overall revenue, compared to 41% for the same period one year ago. We like Accenture’s continued expansion in outsourcing. The chart below show that in constant currency, outsourcing revenue growth since 2005 has been less volatile than consulting revenue growth. We see that in the long run, consulting service is more vulnerable to economic downturns, while demand for outsourcing service remained solid throughout business cycles. In the current market environment, businesses continue to focus on improving effectiveness and save costs, which boosts the demand for outsourcing. Generally, Accenture’s consulting contracts are less than 12 months in duration, while outsourcing contracts are larger, longer-term. Therefore, increased outsourcing contracts typically provide a more sustained revenue stream.
Another advantage of Accenture is the strengths of its clients. Accenture’s clients include 96 of the FORTUNE Global 100, and 80 of the FTSE 100. As a result of the current economic uncertainty, contract pattern is shifted towards larger projects of longer duration and increased focus on business case outcome, and less of very small project work, which means that bookings overall does not convert to revenues as quickly as before. Despite this new pattern, Accenture delivered YoY revenue increase of 6% and YoY EPS increase of 11% in 3Q2012. The company also updated FY2012 EPS forecast to be in the range of $3.80 to $3.84, which would be a 12-13% YoY increase.
One of the biggest concerns for Accenture currently is the recessionary economic environment in Europe. Accenture is geographically diversified, and it generates a major portion of its revenue from the EMEA region (shown in the chart below). For 3Q2012, Accenture had a modest 1% decline in revenue in the EMEA region, due to less consulting revenue, partially offset by increase in outsourcing. However, there’s no sign of contagion, as revenue for the Americas region grew 10% for the same period. Consulting revenue is expected to be flat for 4Q2012.
Despite headwinds, we believe that Accenture is well-positioned in the current market. The company keeps a highly diversified portfolio; it consistently rewards its shareholders; it allocates resources efficiently by focusing on its core operations; and it continues to invest heavily on its human resource capital which provides competitive advantage over its peers. We expect Accenture to generate long-term returns for its shareholders.
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