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Accenture: Module 9

Accenture: Module 9. Kevin Overholt 3-24-2014. Background. Accenture is a global leader in the information technology services industry. Spinoff of Arthur Andersen’s consulting branch. Three core businesses are technology consulting, software development, and outsourcing services.

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Accenture: Module 9

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  1. Accenture: Module 9 Kevin Overholt 3-24-2014

  2. Background • Accenture is a global leader in the information technology services industry. • Spinoff of Arthur Andersen’s consulting branch. • Three core businesses are technology consulting, software development, and outsourcing services. • Current share price is $78.08 with a market cap of $63.06 billion.

  3. Accenture’s Financial Statements • Balance Sheet • Relatively small Total Assets and Total Liabilities • Zero Long-Term Debt • Largest account balance is Cash • In reality, most valuable asset is people. Not on Balance Sheet. • Conclusion: Accenture has zero NEA. • Income Statement • 70% of revenues go directly to salary/service expense. • Steady growth in Net Income (roughly 10% annually) • 93-94% of income comes from services, 6-7% from non-enterprise activities

  4. Residual Enterprise Income

  5. Problems with REI Model • Discount rate of 8% is about double what my prior calculations specified. I adjusted it from 4.14% to 8% to reflect the industry as well as make the model work. (Sales growth > rEnt) • Because Accenture has little to no NEA, the continuing value captures 90.6% of the valuation. Not reliable. • The technology industry, and specifically the technology consulting industry, is very volatile. High uncertainty to the projected figures.

  6. Equity Valuation • Net Financial Liabilities (in millions): • Long Term Debt: 3 • Preferred (Restricted) Stock Units: 864 • Noncontrolling Interest: 479 • Excess Cash: (5,023) Net Financial Liabilities (3,679) For Accenture, the value of equity = $159,515 + 3,679 = $163,194

  7. Sensitivity Analysis (In Millions)

  8. New Sensitivity Analysis (In Millions)

  9. New Sensitivity Analysis (In Millions) Market Cap @ 3/23/2014 = 66.9 B Conclusion: Buy, Buy, Buy

  10. Value Line • Notable: • Drop in EPS in 2014, strong recovery through 2017 • BV per share increases significantly in 2014-2017 • Price Target is $90 in 2017, compared to ~$82 today

  11. Valuing Accenture ValueLine Forecasts for 2014-2018 • The BV Per Share, calculated through accounting methodologies, was more than double the amount given by ValueLine. • The Implied Earnings Growth Rate was also roughly 1.5% per annum greater than my prior estimations. • However, the $90 forecast for the stock price only reflects less than a 3% per annum growth in stock price over the next four years.

  12. Analyst Dividend Discount Model • Again, much of the valuation is captured in the continuing value. • Very close to the current ACN market cap: $66.9B

  13. Analyst Residual Income Model • Because of the unique nature of Accenture, the residual income model will have little use to us from a valuation perspective. • The company has zero NEA, so the BV used in the Residual Income Model would be inexact. • As seen previously, over 90% of the value in the residual income model stems from the continuing value, which is clearly inaccurate. • In my opinion, the best valuation comes from adhering to the dividend discount model.

  14. Conclusion • Using my (very) rough estimates towards the rEnt and growth figures, I came up with a value of $159.5B for the equity of Accenture. • The analysts came much closer to the actual market cap of Accenture stock. They valued the firm’s equity at $69.7B. • The actual market cap of Accenture is 66.9B, as of March 23, 2014.

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