Accenture (ACN)

Accenture (ACN)

Summary:  Watch

Score:  10/20

MOS:  1%

Share Price:  $348

Sticker Price:  $352

Is Accenture stock a good buy?

Accenture is a global management consulting firm. They were founded in 1989 and are headquartered in Dublin, Ireland. Today they have over 674,000 employees.

 

Company History

  • Accenture began as a business and technology consulting firm known as Andersen Consulting which was a division operated within the accounting firm, Arthur Andersen. In the early 1950s, one of their first jobs was the installation of a computer and printer at GE. This is believed to be the first commercial use of a computer in the US.
  • In 1989, tensions started to rise between Andersen Consulting and Arthur Andersen as Andersen Consulting was obligated to pay Arthur Andersen 15% of its profits. At the same time, Arthur Andersen created a new consulting firm known as Arthur Andersen Business Consulting, which was competing with Andersen Consulting. In 2000, the legal battle came to an end and Andersen Consulting broke all contractual ties with Arthur Andersen. Andersen Consulting paid Arthur Andersen $1.2B, parted ways, and changed its name to Accenture.
  • The name Accenture is derived from the phrase “Accent on the future.” The name is meant to position Accenture as a global consulting leader.
  • In 2001, Accenture filed its IPO and went public at $14.50 per share.
  • In 2002, they headquartered in Bermuda to avoid paying US taxes.
  • In 2009, they changed their headquarters to Ireland where they were only paying 3.5% tax. The UK was considered but with a 24% tax, the board of directors decided Ireland was the ideal location.
  • In 2014, Accenture replaced CGI Group as the lead contractor on HealthCare.gov, a $563M contract.
  • In 2015, the United States Department of Defense awarded a major electronic health record contract to Cerner, Leiods, and Accenture. The contract was valued at $4.33B which served 55 hospitals and 600 clinics.
  • In 2017, Accenture announced a partnership with Apple to work on the iOS software.
  • In 2018, Accenture generated controversy over the amount of money they charged to recruit 7,500 customs and border protection offers. Accenture was charging $40K per hire which was more than the average salary of each border protection officer. The contract was terminated in 2019.
  • In 2019, contractors from Accenture’s Austin, TX branch who provided consulting services to Facebook wrote an open letter to Facebook describing poor working conditions. These conditions include restricted breaks, strict non-disclosure agreements, and PTSD from auditing graphic content posted on Facebook which included violence, hate speech, animal abuse, and child abuse.

 

Business Model

Accenture is a management consulting firm, a service business model.

The pros of a service model are you don’t have to manufacture products or deal with supply chain issues. As long as you have people to provide the service, you can generate revenue relatively quickly.

The con of a service model is that it’s not scalable. A service model is essentially a business model where you trade time for a paycheck. Those of you who run your own businesses know that you want to generate leveraged revenue. In other words, you want to generate revenue by selling products or making money while you sleep. With a service model, the only way you can grow is to increase liabilities or in other words, increase payroll. You have to hire more consultants and management consultants aren’t cheap.

Accenture is one of the most prestigious consulting around the world. Some of the other top firms include McKinsey & Company, Boston Consulting Group, Bain & Company, Deloitte, PwC Advisory, and Ernst & Young. Management consulting firms can charge between $350 and $1,000 per hour/per associate. Depending on the seniority of the associate, the rate will vary. Management consulting projects typically cost hundreds of thousands on up to millions of dollars. The revenues can be substantial but with that comes a price in the form of liabilities.

 

Management Consulting (High Salaries = High Costs)

We’re going to sidetrack for a moment and talk about the cost of management consultants. Thereafter we’ll get back to the stock.

Based on this article from caseinterview.com, here is a breakdown of average management consulting salaries. Keep in mind, these numbers are based on US salaries. Other countries may vary based on currency conversion and market averages.

  • College Graduates – Base salary of $83,500, a bonus up to $18,000, and a signing bonus of $5,000. Total compensation of $106,500.
  • MBA Hires – Base salary of $149,000, a bonus up to $37,000, and a signing bonus of $25,000. Total compensation of $211,000.
  • Project Leaders – Base salary of $175,000, a bonus up to $80,000, profit-sharing up to $30,000. Total compensation of $285,000.
  • Partners – Base salary between $570,000 – $1,000,000, and a bonus up to $300,000. Total compensation can be $1,300,000 and up.

Although the salaries are higher than most careers, management consultants work a lot of hours. This article from consultancy.eu states that consultants work an average of 50 – 80 hours per week. This may be on the low end because other publications, including this article from efinancialcareers.com states that most consultants work 70 – 80 hours per week. This translates to 14 – 16 hours per day. I’ve known consultants to consistently put in 80 hours per week over 6 days. Saturday mornings and afternoons can be spent cleaning up emails or working on PowerPoints for the following week. Saturday nights are occasionally free along with Sunday mornings. Sunday nights are dedicated to preparations for the following week. That essentially gives you a 12 – 24 hour window to yourself per week. Not ideal for those who have hobbies. This article from casecoach.com states the average career lifespan of a management consultant is 2.7 years. The reason is the lack of work/life balance. Yes, as a consultant you can make a lot of money in a short time span but burnout is extremely high. By comparison, the average career length of an NFL player is 3.3 years and the average career length of an NBA player is 4.5 years. Even highly physical careers are more sustainable than the corporate pressure cooker of management consulting.

If you’re looking to quickly build up your investment portfolio, getting a steady paycheck is key but getting a high-paying steady paycheck is even better. I typically recommend getting a job in IT. There are plenty of non-coding-related positions that pay very well and have excellent work/life balance. But, if you want to accelerate your investment portfolio even faster, getting a job in management consulting is a great option but obtaining a career as a consultant at a top-paying firm isn’t exactly easy. This article from onlinebusiness.northeastern.edu provides an outline of 5 requirements to get into the management consulting industry. You don’t need all 5 but the more you have, the better your odds (if they are ever in your favor).

  1. Bachelor’s degree. Obtain a bachelor’s degree from a highly respected university. If you attended a community college or small unknown university, you probably won’t stand a chance. Top firms typically look for top Universities. In some cases, even a state University won’t cut it. It may sound superficial but this is the unfortunate truth with breaking into this industry. Names that stand out include Harvard, Stanford, MIT, Yale, Princeton, Columbia, Duke, Brown, Cornell, Hofstra, Rice, and more. 
  2. Big business. Navigating the corporate world is essential and understanding how big business operates is extremely important. As a consultant, you are assigned on projects at large companies and without any training, you should know how to navigate the culture and understand how big businesses market, sell, and operate.
  3. Certifications. Certifications can make you look better on paper. PMP (Project Management Professional), CISSP (Certified Information Systems Security Professional), AWS Certified Solutions Architect, etc. Spend the time and money to get certifications as it can make you a more attractive candidate.
  4. Soft skills. You should have the ability to talk to technical people and senior executives in the same breath. The words you use, the tone you deliver, the vibe you give off all play a part. As a consultant, you are representing a prestigious firm and how you handle yourself professionally is extremely important if you’re going to work in this industry. The best way to improve your soft skills is to work in stressful environments and overcome people-related problems. This will help you manage your own emotions and help influence the emotions of others. 
  5. Masters Degree. Obtaining a Masters’s Degree isn’t always required but it can’t hurt. Similar to certifications, this will make you look better on paper.

As you can see, management consultants come at a high cost. If a consulting firm is going to increase revenue, there is a direct relation to an increase in liabilities. This means Accenture’s stock will most likely not achieve large returns like other companies which generate revenue with products as opposed to services.

Here is a comparison to the 5-year returns of other companies.

  • Accenture (ACN) – 202% return over the last 5 years
  • Microsoft (MSFT) – 382% return over the last 5 years
  • Fortinet (FTNT) – 854% return over the last 5 years
  • Advanced Micro Devices (AMD) – 1,200% return over the last 5 years
  • Tesla (TSLA) – 2,000% return over the last 5 years

 

News

This video from CNBC interviews Accenture’s CEO, Julie Sweet, and she talks about hiring 50,000 people in a single quarter. This shows the demand for management consulting services which is a great sign for Accenture investors.

This article from seekingalpha.com lists 7 top dividend stocks for 2022 including Accenture (ACN), Armanino Foods of Distinction (AMNF), Essity (ESSYY), Gilead Sciences (GILD), Medtronic (MDT), Ørsted (DNNGY), Sonova (SONVY).

This article from zacks.com provides three reasons why Accenture shouldn’t be overlooked. These three reasons include past EPS Growth Rates, Free Cash Flow Growth Rates, and future EPS Estimates. Although they are a service business, they are able to pile away cash.

 

Competitive Comparison

Most management consulting firms are private because they are service businesses. As mentioned earlier, service businesses can’t scale without adding significant liabilities.

Deloitte, McKinsey & Company, Boston Consulting Group, PwC Advisory/Strategy, and Ernst & Young are all private companies.

 

Accenture (ACN)

Summary:  Watch

Score:  10/20

MOS:  1%

Share Price:  $322

Sticker Price:  $1,619

Revenue: $50B

 

Booz Allen Hamilton (BAH)

Summary:  On Sale

Score:  18/20

MOS:  80%

Share Price:  $88

Sticker Price:  $442

Revenue: $7B

 

Marsh & McLennan Companies (BAH)

Summary:  Watch

Score:  15/20

MOS:  45%

Share Price:  $158

Sticker Price:  $287

Revenue: $17B

 

Infosys (INFY)

Summary:  Watch

Score:  12/20

MOS:  1%

Share Price:  $25

Sticker Price:  $25

Revenue: $13B

 

4 M’s

MOS (Margin of Safety): The score of 10/20 isn’t bad but the issue is the 1% MOS. This shows that Accenture doesn’t have a lot of upside potential. When you take a closer look at the financial statements, it’s nice to see the revenue and net income increase year over year. The same goes for the increased cash flow. The problem is the balance sheet. The liabilities and debts increase in parallel to the revenue and net income. As mentioned earlier, this is a problem for service businesses and why most service businesses don’t go public.

Meaning: Management consulting is a service business. As revenue increases, so do the liabilities. This will prevent this stock from generating market-beating returns year over year. That is totally fine if you want a long-term slow and steady stock. 

Moat: Aside from the service model being a red flag, the moat is the other major red flag. There are other prestigious consulting firms including McKinsey & Company, Boston Consulting Group, Bain & Company, Deloitte, PwC Advisory, and Ernst & Young. Each of these companies can easily take market share away from Accenture.

Management: Julie Sweet was named CEO in 2019. Prior to 2019, she worked as an attorney at Cravath, Swaine & Moore for 17 years including 10 years as a partner. Her experience at the firm includes financing, mergers, and acquisitions. Accenture recruited Sweet in 2010 where she developed Accenture’s mergers and acquisitions strategy. Sweet is known to have a strong focus on diversity and inclusion. Her goal is to make the workforce equally balanced between men and women. As of 2019, Accenture’s workforce is 42% female. From my perspective, she’s a good fit as CEO. If she were to move directly from a law firm to CEO of a public company, I would question the board of directors on that play. I do like the fact that she has 9 years of experience at Accenture in management roles prior to being named CEO. This tells us she has plenty of experience understanding how to grow a management consulting firm.

 

Financials

Now let’s take a look at the financials. A good value investor should be able to read the income statement, cash flow statement, and balance sheet and within 60 seconds have a pretty good idea of how the business is performing.

Revenue (Found on the Income Statement)

2018:  $40B

2019:  $43B

2020:  $44B

2021:  $50B

Revenue has increased consistently over the last 4 years.

 

Net Income (Found on the Income Statement)

2018:  $4B

2019:  $4.7B

2020:  $5.1B

2021:  $5.9B

Net Income has increased consistently over the last 4 years.

 

EPS (Found on the Income Statement)

2018:  6.20

2019:  7.35

2020:  8.03

2021:  9.31

EPS has consistently increased.

 

Free Cash Flow (Found on the Cash Flow Statement)

2018:  $5.4B

2019:  $6B

2020:  $7.6B

2021:  $8.3B

Free Cash Flow has increased consistently over the last 4 years.

 

Total Assets (Found on the Balance Sheet)

2018:  $24B

2019:  $29B

2020:  $37B

2021:  $43B

Total Assets have increased consistently over the last 4 years.

 

Total Liabilities (Found on the Balance Sheet)

2018:  $14B

2019:  $15B

2020:  $19B

2021:  $23B

The Total Liabilities have increased consistently over the last 4 years. This is common with growing service business models.

 

Total Debt (Found on the Balance Sheet)

2018:  $19M

2019:  $16M

2020:  $2.7B

2021:  $2.7B

The debt has significantly increased in 2020. This is most likely due to the need for more capital to cover payroll.

 

Total Equity (Found on the Balance Sheet)

2017:  $10B

2018:  $14B

2019:  $17B

2020:  $19B

The Total Equity has increased consistently over the last 4 years.

 

Of the 4 M’s, the Management is the only M that passes the test. The MOS numbers could use some improvement but the Meaning and Moat make this stock a risk if you’re looking for market-beating returns. Although Accenture had over a 50% return in 2021, the 5-year returns were just over 200% which doesn’t compete with highly scalable product businesses such as Microsoft (MSFT), Fortinet (FTNT), Advanced Micro Devices (AMD), and Tesla (TSLA). 200% return over 5 years isn’t bad, by comparison, the S&P 500 generated about 100% return. If you want a slow and steady winner over the coming years, Accenture may be worth a look. 

The Summary, Score, and MOS of this stock may have changed since the posting of this review. Please login to Tykr to see up-to-date information.