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Accenture Rides on Buyouts & Cloud, Pricing Pressure Rife

Zacks Equity Research

Accenture plc ACN is steadily gaining traction in the outsourcing as well as consulting businesses. Acquisitions are enabling the company to enhance cloud capabilities.

The company recently reported strong first-quarter fiscal 2019 results, with earnings and revenues beating the Zacks Consensus Estimate. Adjusted earnings of $1.96 per share surpassed the consensus estimate by 12 cents and improved from the year-ago quarter’s figure by 17 cents. Net revenues of $10.6 billion beat the consensus mark by $131.9 million and rose 7% year over year on a reported basis and 9.5% in terms of local currency.

Accenture has an impressive earnings surprise history. It surpassed estimates in each of the trailing four quarters, with an average positive surprise of 4.6%. For the fiscal second quarter, the consensus estimate moved down 2.5% in the past 30 days.

Acquisitions: Key Growth Strategy

In fiscal 2018, Accenture closed acquisition deals for a total consideration of $596 million. By the end of 2018, the company had made a total of 135 acquisitions. These buyouts have enabled Accenture to enter new markets, diversify and broaden product portfolio, strengthen cloud capabilities and maintain strong market position. They are expected to contribute significantly to the company’s revenue stream.

Accenture PLC Revenue (TTM)

Accenture PLC Revenue (TTM) | Accenture PLC Quote

Well Poised on Cloud

As enterprises progress with digital transformation efforts, the use of cloud services is expected to significantly increase going forward. Research firm Gartner expects worldwide public cloud revenues to grow 17.3% in 2019 to $206.2 billion, up from $175.8 billion in 2018. Per International Data Corp. (IDC), the public cloud services and infrastructure market will witness a compounded annual growth rate (CAGR) of 21% during the 2016-2021 period, with spending reaching $266 billion in 2021.

So, the strategy of enhancing cloud capabilities through acquisitions is a step in the right direction and will drive growth in the long term.

Outsourcing and Consulting Gain Strength

These two businesses of Accenture are growing steadily on rising demand for expertise to improve efficiency and reduce costs. On the outsourcing front, the company continues to see strong demand to assist clients with the operation and maintenance of digital-related services and cloud enablement. On the consulting front, Accenture experiences strong demand for digital, cloud- and security-related services.

Strong Cash Position

As of Nov 30, 2018, the company had cash and cash equivalents of approximately $4.4 billion. A strong cash position enables Accenture to pursue strategic acquisitions, invest in growth initiatives and return cash through regular quarterly dividend payment and share repurchases.

Competitive Talent Market Is a Concern

Higher talent costs due to a competitive talent market coupled with President Trump’s stringent policies on immigration is hurting consulting services providers like Accenture. The industry is labor intensive and heavily dependent on foreign talent.

Competition and Pricing Pressure

Accenture’s market share and revenues are primarily dependent on client relationships and the number of contracts secure. This along with the limited scope for product differentiation makes the renegotiation of large contracts extremely important. That said, competition from strong companies like Genpact G, Cognizant CTSH and Infosys INFY is a persistent pressure. This eventually leads to pricing pressure.

Accenture currently has a Zacks Rank #3 (Hold).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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