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Accenture Analysis

Steve Schudin

November, 2013

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Accenture (ACN) is a multi-national firm that offers many business to business services.

They have long been known as management consultants and now have a wide range of

outsourcing opportunities in information technology, risk management, systems integration,

security, customer service, financial services and resource optimization.

The company’s world headquarters is in Dublin, Ireland and its North American

operations has offices in 23 states. It employs about 275,000 people worldwide.

The company has a fiscal year that ends on August 31st. Their most recent 10-K was just

filed with the SEC on October 29th, 2013.

Mercifully, this company’s financials look better that the last one that I analyzed, but it

does contain a few issues that warrant further study before a decision to invest is made.

On the surface the balance sheet is not bad. Their 2013 current ratio is 1.45. Their

previous year’s current ratio was 1.55. I took a glance back at some previous years and saw that

the current ratio has always been between 1.35 and 1.55. Clearly they are making money from

operations and not underwater with short-term obligations.

Shareholder’s equity as a percentage of total assets was 28% for fiscal year 2012. For

fiscal year 2013 it improved to 32%. Very respectable!

One thing to consider is that while total assets grew between the last two fiscal years,

cash actually dropped and current assets as a percentage of total assets dropped as well. Between

2012 and 2013, total assets experienced a small increase of 1.2%. During those same two

periods, current assets as a percentage of total assets dropped from 76% for 2012 to 70% for

2012.

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So where were the biggest changes in the asset mix? Among the current assets the two

biggest changes were increases in receivables and unbilled services. Between fiscal 2012 and

2013, accounts receivable increased a noteworthy 8.2%. This increase in receivables would not

be bad in and of itself, except that for the same two periods, cash dropped by an even more

noteworthy 15%. Meanwhile, unbilled services increased by 8% between 2012 and 2013.

So on the surface we have a balance sheet that looks very healthy, but with some hidden

issues. Has the company had trouble collecting on receivables in the past year? If receivables

grew by 8% and, hypothetically, cash grew by a lesser percentage like 4 or 5 %, then it would

just look like normal business growth where both cash and receivables grew; one just grew a

little larger than the other. With cash decreasing and unbilled services also increasing however I

have to call this a red flag. It could mean that, for whatever reason, the company has been doing

some work in the past year and not getting paid for it; at least not yet.

For noncurrent assets, the biggest mover was goodwill. Between 2012 and 2013 it grew

by a whopping 50%! To sum up I think that Accenture has a liquidity problem with its assets at

present. Assets have grown and the assets-to-liabilities picture continues to look very good.

Liquidity amongst the assets has gotten worse, though, and this is something that needs further

study.

For the 2013 income statement, we have three years of comparative data that looks very

good. From fiscal years 2011 to 2013, net income grew by 39%, with 26% of that growth

occurring between 2012 and 2013. In all three years there was growth in both earnings-per share

and in the annual dividend. From 2011 to 2013 fiscal years, diluted EPS grew from $3.40 to

$4.93. During that same three-year period, per-share dividend grew from $0.90 to $1.62.

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The company’s statement of cash flows also has some areas that are impressive and some

areas for concern. First of all operating cash grew impressively from the 2011 to 2012 fiscal

years, both in dollar amount and as a percentage of current assets. In 2011 operating cash was

$3,441,739,000 and 30% of current assets. By 2012 it had grown almost 24% from the previous

year to $4,256,852,000 and 34% of current assets.

Then for the current year things dropped back a bit. For fiscal 2013, operating cash had

shrunk a little more than 22% to $3,303,128,000 and 28% of current assets. During this same

two-year period, fiscal 2012 to 2013, investing cash experienced a vast increase of 116%. It

ballooned from ($535,385,000) in 2012 to ($1,156,215,000) in 2013.

A key to some of the large movements on both the balance sheet and the cash flow

statement can be found on page F-17 of the notes accompanying the financial statements in

Accenture’s 2013 10-K. In this note it is explained that in July of 2013, Accenture made an

acquisition of a company by the name of Acquity Group Ltd. This acquisition required

$282,985,000 in cash. It also applied $215,979,000 to goodwill and $55,972,000 to intangible

assets, largely because Acquity is also a technology outsourcing company and so, like Accenture,

it does not have inventory to speak of.

This acquisition explains a number of things. It makes clear the reason for the shift in

Assets from more to less liquidity between 2012 and 2013 (less cash, more goodwill and

intangibles). It also shoots down my initial reaction that perhaps the company’s receivables

outpacing cash by such a large amount might be due to the company having trouble getting paid

or possibly even having “straw receivables”. If the Acquity purchase had not taken place, then

cash would likely have been in line with the larger receivables when compared to the previous

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year. The Acquity acquisition also clearly explains the very large increase in investing cash

between 2012 and 2013.

My only real concern would be the shrinkage of operating cash between 2012 and 2013.

I could not find a clear reason for this and believe that it is important enough to merit some

further research; perhaps even a call to the company’s Investor Relations office for some

clarification.

I couldn’t resist the urge to look further back and see if there was a “roller coaster” or

“sawtooth” pattern in the company’s cash in previous years. There wasn’t. In fact, in the six

years that I was able to look back (fiscals 2008 through 2013), operating cash had increased

every year except 2013 and the total growth in operating cash for the six-year period was 18%.

If you leave off 2013 and look just at operating cash from 2008-2012, then the growth increases

dramatically to 52%. So possibly Accenture’s odd retreat in this area does have some

explanation and is an anomaly rather than a portent of things to come. Only further research can

tell which scenario is the more likely of the two.

One way to decide what the future of Accenture holds following the Acquity deal would

be to review what management’s track record is with acquisitions. Acquity is in the same

industry as Accenture, so there should already be expertise in place at Accenture to get quick

results from Acquity (as opposed to a classic “guns and butter” scenario, where the acquiring

management knows very little about the company being acquired or its industry).

One good sign that management feels confident in the future of the company is a

consistent year-to-year growth in treasury stock. At present Accenture is holding 135,299,000

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shares of treasury stock, up 20% from 112,410,000 shares in 2012. Again Accenture shows a lot

of consistency in the area. Since 2008 the company has tripled its treasury stock holding.

Finally the company has had consistent growth in retained earnings for several years in a

row, including 2013. Even with the burden of the Acquity purchase on the company’s 2013

reports, Accenture managed to increase retained earnings 27% between 2012 and 2013.

Accenture’s 2013 10-K was audited by the KPMG’s Chicago office. The auditor’s report

did not find anything amiss. The 2013 10-K fairly represents Accenture’s financial position as of

August 31st, 2013 and is in conformity with GAAP, according to KPMG.

At the market close on Friday, November 15, 2013, Accenture’s share price closed at

$78.02. This gives the stock a P/E ratio of 15.82 and a Price/Book of 9.88. The stock’s 52-week

range is $65.20 - 84.22.

My recommendation is to spend a little time making a phone call to Accenture’s Investor

Relations office and see what kind of statement they have to make about the decline in operating

cash flow. If their answer sounds like something that doesn’t have steam rising from it, then I

would begin to buy.

Since the stock has been down around 65 in the recent past and also since it appears that

the company’s performance is consistent and it is not a “here today, gone tomorrow” stock, then

I would split the difference between the current price and the 52-week low and put in a buy order

at 72 (70 if you’re feeling conservative). If the stock drops a couple of dollars for a time that

won’t matter since we know that the company’s fundamentals are solid. If the share price dips

into the 70-72 range briefly during the trading day then that would be enough for some shares to

be acquired automatically. A good entry share price combined with the company’s consistent

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and growing dividend history should make Accenture a safe investment for the foreseeable

future.