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Questor: a low-risk, high-return way to invest in ‘the fourth industrial revolution’

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·4 min read
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A visitor passes a video display showing Tower Bridge in the Accenture pavilion at the Mobile World Congress in Barcelona - Pau Barrena/Bloomberg
A visitor passes a video display showing Tower Bridge in the Accenture pavilion at the Mobile World Congress in Barcelona - Pau Barrena/Bloomberg

It was called the best-timed rebranding in history: Andersen Consulting became Accenture just as the accountancy group of the same name followed Enron, the fraudulent American energy firm audited by Andersen, into oblivion.

Even if the association lingers in some investors’ minds, the company now offers one of the best ways to profit, in one fund manager’s words, from “the fourth industrial revolution” – the drastic improvements in productivity possible thanks to the likes of cloud computing, artificial intelligence and big data.

Digital technology has evolved to the point where businesses of almost every sort can benefit from its adoption – or indeed to the point where they must adopt it if they are to survive. Many will be unable to make the most of the opportunity with their existing IT set-up and will turn to outside consultants for help.

“After the demise of Arthur Andersen, Accenture adopted a new business model of focusing on helping clients with strategic tech developments,” says Gerrit Smit, manager of the Stonehage Fleming Global Best Ideas Equity fund, in which Accenture is a top 10 holding. “They are now the leading consultants in this area.”

He says the company has a “very straightforward business model: it sells expertise”. As a result, it’s a business that stands or falls on the quality of its employees. “It’s a pure people business – there’s no need for it to own any other type of asset,” says Smit. “If there are gaps in its expertise, such as in niche areas that may grow into major ones, it will make small acquisitions to get its hands on the teams it needs. It has done this in cybersecurity, for example.”

Getting the right people is vital but so too is keeping them. “Accenture makes itself an attractive employer by allowing staff to share in the growth of the business. It issues new shares to give to employees as incentives,” he says.

This is a common practice among tech companies but some investors dislike it because it is a disguised cost that manifests itself in dilution of existing holders. But Smit says Accenture addresses this problem: “it uses some of its profits to buy back shares, so the total number in issue doesn’t go up”.

He says it is the attention the company pays to retaining staff that has allowed it to draw ahead of its key rival, IBM’s consulting arm. “The need to keep people is the key vulnerability for these consultancies. Accenture is now where IBM should have been. IBM lost its lead because it didn’t incentivise people to stay.” But it remains a “fierce competitor”, he says, while a number of Indian companies are also active.

Smit says the firm’s lack of need to devote some of its income to buying assets to sustain and grow its business makes it an “exceptionally strong cash generator” and allowed it, before the pandemic, to make returns on capital of 40pc or more. “We don’t have many in that category,” he says.

“It is growing: its organic sales growth is in the high single-digit percentages,” he adds. “But its real value lies in the combination of good, if not exceptional, growth and the ability to convert those growing profits into free cash consistently year after year – it’s not a cyclical business.

“Since 2013 our investment in this firm has been compounding at 22pc a year on a total return basis, compared with 15.1pc from the broader New York market, where it is listed. I’m not going to make the case for more 22pc years but I will make the case for continuing good returns. The opportunity for growth in technical services is very clear and I see the ability to convert profits into free cash as the main determinant of the success of any business.”

He adds: “Accenture’s strong cash generation model makes it a relatively low-risk, sustainable technology compounder. It looks highly valued relative to earnings but relative to cash generation it’s not expensive.”

Questor says: buy

Ticker: NYSE: ACN

Share price at close: $341.49

Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 5am.

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