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Accenture business and markets

MBA 509 spring 2009 Financial analysis

Photo Accenture 1

MBA 590 | Spring 2009 | Final Presentation | Agrawal | Birani | Bowles-Carey | Ravi-Kumar | Vachhani


Why this price?

Buy

• Damodaran regression multiple suggests the stock price should be $77.78 because at the current price it is 64.4% undervalued.

[ Our recommendation ]

• Discounted FCFF analysis identified

$78.34 as the most likely scenario, based on assumption that Accenture will continue to grow at 12% per year, it’s historical average. This seems a more likely rate than the 15% industry average, given the overall economic climate.

• The worst-case scenario based on the 9% growth rate of the S&P 500 doesn’t adequately take into account Accenture’s competitive advantages.

[ Approximate target value ]

$78

• Though the financial sector is in a state of chaos, Accenture operates in other sectors where growth prospects are promising--communications and high technology, and public service. • On balance, Accenture’s future opportunities outweigh the risks it faces, because some of the risks are actually within the firm’s sphere of control—service risk, employee acculturation, and degree of exposure to emerging markets. • Accenture’s expertise derives in part from research—they study what makes companies high performers. This knowledge gives them a competitive advantage as the foundation of its operational strategy.

Photo Accenture 2

MBA 590 | Spring 2009 | Final Presentation | Agrawal | Birani | Bowles-Carey | Ravi-Kumar | Vachhani


Accenture business and markets

Accenture

(High performance. Delivered.)

market capitalization*

$19 billion net revenues*

communications & high technology financial services products public service resources

• Originally conceived in 1953 as

the consulting division of Arthur Andersen.

$23 billion

• 1989 split off as Andersen Consulting.

employees*

• 1998 firm claimed breach of contract with parent company.

186,000

Insight

Industry pioneer. Global position.

• Through 1990’s, tension between Andersen Consulting and parent company increased.

• By 2000, was earning revenues that exceeded those of parent firm. • Arbitration settlement allowed Andersen Consulting to sever all contractual ties to parent, but required the firm to change its name. • Some misperception that name change was linked to Enron scandal, but Accenture was absolved of any involvement. • Some public criticism of the firm’s incorporation in a tax-haven country, and for outsourcing American jobs to foreign countries.

*2008 3

Overview of the firm:

MBA 590 | Spring 2009 | Final Presentation | Agrawal | Birani | Bowles-Carey | Ravi-Kumar | Vachhani


Accenture strategy business and markets

strategy: differentiation

(High performance. Delivered.) Strategy: Research initiative includes:

research

employee training

leadership position in market

• Focus on the characteristics of high performance firms. • More than 6,000 companies included in research. • Initiated in 2003. • Publish in prestigious media—Wall Street Journal and Harvard Business Review.

Insight

Powerful strategy. Powerful branding around strategy.

Employee training initiatives include: • Ethical business conduct. Leadership position in market includes: • Stellar client list. • Financial strength. • Strategic acquisition capabilities.

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MBA 590 | Spring 2009 | Final Presentation | Agrawal | Birani | Bowles-Carey | Ravi-Kumar | Vachhani


Accenture competitive business andposition markets

Insight

Accenture is watching IBM closely. Accenture Intelligent City Network $23 billion*

$20 billion*

IBM $104 billion* $3 billion*

Competitive position: • Well-positioned against Bearingpoint and EDS. • It is unclear where EDS is planning to go strategically, after acquisition by HP.

* circle size corresponds to value of 2008 net revenues. 5

MBA 590 | Spring 2009 | Final Presentation | Agrawal | Birani | Bowles-Carey | Ravi-Kumar | Vachhani

• Note that in March of 2009, Accenture announced a new corporate initiative—the Accenture Intelligent City Network—designed to build support for smart systems initiatives.


Accenture business and markets Competitors

IBM (A smarter planet.) aerospace & defense automotive banking chemicals & petroleum net revenues* distribution education electronics employees* energy & utilities government healthcare Insight insurance IBM is innovative and resource rich. life sciences media & entertainment telecommunications *2008 market capitalization*

$134 billion $104 billion 410,000

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MBA 590 | Spring 2009 | Final Presentation | Agrawal | Birani | Bowles-Carey | Ravi-Kumar | Vachhani

IBM: • Founded 1910, based in Armonk, NY. • Market leader in independent systems management and services. • Strategy: differentiation. • Under the umbrella tagline of “a smarter planet,” IBM collaborates with other innovative firms in the development of “smart,” sustainable systems—traffic, power, healthcare, food delivery, finance, telecommunications, and water.


Accenture business and markets Competitors

EDS acquisition price*

$12.6 billion net revenues*

defense energy & utilities financial services media & entertainment transportation

$20 billion employees*

139,500 Insight

Considered by analysts an underperformer, EDS’s recent acquisition by HP may signal a significant change in strategy. *2008 7

EDS: • Founded 1962, in Plano, Texas. • Acquired in 2008 by Hewlett-Packard Corporation for $12.6 billion. • Pioneered the concept of computer outsourcing. • Prior to acquisition by HP, largest independent systems management and services provider in U.S. • Competitive advantage in EDS Best Shore IT® outsourcing service. • Future strategy unknown.

MBA 590 | Spring 2009 | Final Presentation | Agrawal | Birani | Bowles-Carey | Ravi-Kumar | Vachhani


Accenture business and markets Competitors

Bearingpoint market capitalization*

$4 billion net revenues*

$3 billion

aerospace public service higher education healthcare transportation

chapter 11 bankruptcy*

2009

Bearingpoint: • Founded in 1999 and based in MacLean, VA. • Formerly KPMG.

Insight

Bearingpoint’s bankruptcy and plans to sell large parts of its business may spur an exodus of talent.

• Primary market is North America. • Filed for Chapter 11 reorganizaiton in 2009. • Undistinguished vision and strategy. • Currently exploring selling significant portions of their business.

*2008 8

MBA 590 | Spring 2009 | Final Presentation | Agrawal | Birani | Bowles-Carey | Ravi-Kumar | Vachhani


Opportunities

Emerging markets Technology innovations Branding Tactical acquisitions Communications & high technology Insight

Accenture’s opportunities align with its competitive strengths.

Opportunities: • Expansion in global footprint and leadership position in emerging markets. • Investment in new assets and offerings, in technology innovations and in brand positioning. • Investment in targeted tactical acquisitions to enhance specific capabilities. • The growth strategies of companies across the landscape of advertising, film, music, publishing, radio, the internet, videogames and television.

Photo Danielle Cosme 9

MBA 590 | Spring 2009 | Final Presentation | Agrawal | Birani | Bowles-Carey | Ravi-Kumar | Vachhani


Risks Expensive talent Offshore competition Emerging market exposure Service risks Cultural/social adaptation China

Risks: • Skilled talent is becoming expensive.

Insight

Not all of the risks facing the firm are beyond their influence.

• Offshore competition may weaken the firm’s margins. • Large exposure to developing markets. • The firm’s services create a set of distinct risks, including “service delays, contract disruption and lower productivity. • Increasing offshore hiring requires “adjusting recruiting, training and local compensation policies to address different geographic requirements and expectations. • China: CEOs urge a pragmatic approach to risk.

Photo Carly Mankus 10

MBA 590 | Spring 2009 | Final Presentation | Agrawal | Birani | Bowles-Carey | Ravi-Kumar | Vachhani


Return on equity 120% 100%

Insight

ROE is improving each year, and is expected to continue improving in the coming years.

80%

60%

40%

20%

0%

2004

2005

2006

2007

2008

2009

2009*

2008

2007

2006

2005

2004

% Net margin

6.7

6.7

5.8

5.3

5.5

4.6

% ROA

13.8

14.7

12.3

10.6

11.1

9.6

% ROE

100.7

73.5

62.8

54.2

59.4

60.0

Return on equity: • The Return on Equity is improving each year and is also expected to improve in the coming years, which makes it a good decision to invest in the company.

* End of Q2. 11

MBA 590 | Spring 2009 | Final Presentation | Agrawal | Birani | Bowles-Carey | Ravi-Kumar | Vachhani


Sustainable growth

Insight

Accenture is generating more cash than is consistent with their capital structure.

80%

70%

60%

50%

40%

30%

20%

10%

0%

g*

g 2004

2005

2006

2007

2008

2008

2007

2006

2005

2004

Revenue

$25.3b

$21.4b

$18.2b

$17.1b

$15.1b

Growth rate g

17.9%

17.7%

6.6%

13.1%

12.8%

ROE

0.735

0.628

0.542

0.594

0.600

Retention rate

1

0.82

0.81

1

1

51.5%

43.9%

59.4%

60.0%

Sustainable growth rate g* 73.5%

Sustainable growth: • Here, we can see that over the period of time, sustainable growth rate (g*) greatly exceeds actual Growth in sales (g). • This implies that the company is generating more cash than is consistent with their capital structure.

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MBA 590 | Spring 2009 | Final Presentation | Agrawal | Birani | Bowles-Carey | Ravi-Kumar | Vachhani


Historical free cash flows $2,500

Insight

$2,000

Accenture has experieced strong, steady growth over the past five years.

$1,500 $1,000

$500

$0

2003

2004

2005

2006

2007

2008

2003

2004

2005

2006

2007

2008

% Net reveues

$13,397

$15,114

$17,094

$18,227

$21,453

$25,313

EBIT

$1,613

$1,799

$2,206

$1,924

$2,619

$3,108

Tax rate

.35

.32

.32

.26

.34

.29

NOPAT*

$1,047

$1,223

$1,509

$1,433

$1,723

$2,197

$237

$257

$282

$352

$445

$491

Current assets

$6,459

$8,013

$8,957

$9,497

$10,747

$12,399

Current liabilities

$5,628

$6,542

$7,264

$7,603

$8,684

$9,858

$832

$1,472

$1,697

$1,894

$2,063

2,541

$640

$225

$197

$169

$477

FCF

$840

$1,566

$1,588

$1,998

$2,211

Depreciation

NWC increase in NWC CAPEX *EBIT*(1–tc) 13

(all dollar values in millions, except earnings per share) MBA 590 | Spring 2009 | Final Presentation | Agrawal | Birani | Bowles-Carey | Ravi-Kumar | Vachhani

Source: http://moneycentral.msn.com/ investor/invsub/results/statemnt.aspx?Sy mbol=ACN&lstStatement=10YearSummar y&stmtView=Ann


Value multiples

Accenture

IBM

Bearingpoint

EDS

P/E ttm

9.98

10.59

n/a

n/a

Value/ebitda

3.83

6.33

32.80

n/a

PBV mrq

7.1

9.36

n/a

n/a

P/S ttm

0.67

1.22

0.0

n/a

Value/sales ttm

0.55

1.42

0.19

n/a

Insight

Accenture is a value stock.

Value multiples: • The closest competitor of Accenture Ltd is IBM, since BearingPoint has now gone bankrupt and EDS is privately held by HP. • The company valuation of Accenture Ltd. according to these metrics is way below the market valuation of IBM. • Thus, ACN is a value stock. Source: http://finance.yahoo.com

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MBA 590 | Spring 2009 | Final Presentation | Agrawal | Birani | Bowles-Carey | Ravi-Kumar | Vachhani


Damodaran regression multiples Dependent variable Constant P/E current

24.7

5.67

142.63

0.55

P/B

0

-2.344

18.02

-0.11

17.3

P/S

0

-1.892

14.93

-0.632

PEG

0

0.541

Company

Profit Margin

ln (g)

21.83

0.133

-0.78

Accenture Payout

Payout ratio

0.1792

Growth rate

0.2086

Beta

0.77

ROE

0.8021

PM

0.0710

ln (g)

-1.5674

=Div/EPS

Insight

Accenture is 64.4% undervalued.

Actual

Estimated

Act/Est –1

P/E current

9.98

33.93

-70.6%

P/B

7.10

17.13

-58.6%

P/S

0.67

3.84

-82.5%

PEG

0.77

1.42

-45.8%

15

Payout LT Growth Beta ROE Ratio Rate

Average mispricing -64.4% MBA 590 | Spring 2009 | Final Presentation | Agrawal | Birani | Bowles-Carey | Ravi-Kumar | Vachhani

Damodoran: • According to the Damodaran multiples regression, Accenture is 64.4% undervalued. Source: http://finance.yahoo.com


Discounted free cash flows (best case) Insight

Accenture’s intrinsic share value of its stock would be $90.30 in five years. Accenture 5-year excess return period General pro forma Valuation date: 03/31/09 Discounted excess return period FCFF $11,449

Total corporate value $71,066

Discounted corporate residual value $51,786

Less debt

($1)

$7,831

Less preferred stock

($0)

Total corporate value $71,066

Less short term liabilites

($5,970)

Short term assets

Total value to common equity $65,094

(1) Period

(2) Fiscal year

(3)

(4)

. Rev NOP

(5)

(6)

Intrinsic value of stock

97)

Adj. taxes NOPAT CAPEX

(8)

(9)

. Deprec.

Net invest.

(10)

$90.30 (11)

Change NWC FCFF

(13)

Disc. factor

Disc. FCFF

0

03/10/09 $25,314

1

03/10/10 $29,111

$3,202

$938

$2,264

$370

$565

($195)

$297

$2,162

0.9273

$2,005

2

03/10/11 $33,478

$3,683

$1,079

$2,604

$425

$649

($224)

$341

$2,486

0.8600

$2,138

3

03/10/12 $38,499

$4,235

$1,241

$2,994

$489

$747

($258)

$393

$2,859

0.7975

$2,280

4

03/10/13 $44,274

$4,870

$1,427

$3,443

$562

$859

($297)

$452

$3,288

0.7395

$2,432

5

03/10/14 $50,915

$5,601

$1,641

$3,960

$647

$988

($341)

$519

$3,781

0.6858

$2,593

$6,232

$1,826

$4,406

$1,008

$1,008

$75,511

0.6858

$51,786

Residual

$51,934

(all dollar values in millions, except earnings per share) 16

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MBA 590 | Spring 2009 | Final Presentation | Agrawal | Birani | Bowles-Carey | Ravi-Kumar | Vachhani

Best case: • Assuming the company’s revenue growth to be 15%, same as that of the industry, the best case is the Intrinsic Share Value of Stock will be $90.30 in five years. Sources: http://moneycentral.msn.com/ investor; http://finance.yahoo.com; http:// valuepro.net


Discounted free cash flows (most-likely case) Insight

Accenture’s intrinsic share value of its stock would be $78.35 in five years. Accenture 5-year excess return period General pro forma Valuation date: 03/31/09 Discounted excess return period FCFF

$9,250

Total corporate value $62,455

Discounted corporate residual value $45,375

Less debt

($1)

$7,831

Less preferred stock

($0)

Total corporate value $62,455

Less short term liabilites

($5,970)

Short term assets

Total value to common equity $56,484

(1) Period

(2) Fiscal year

(3)

(4)

. Rev NOP

(5)

(6)

Intrinsic value of stock

97)

Adj. taxes NOPAT CAPEX

(8)

(9)

. Deprec.

Net invest.

(10)

$78.35 (11)

Change NWC FCFF

(13)

Disc. factor

Disc. FCFF

0

03/10/09 $25,314

1

03/10/10 $28,352

$2,679

$785

$1,894

$360

$555

($190)

$238

$1,847

0.9273

$1,712

2

03/10/11 $31,754

$3,001

$879

$2,122

$403

$616

($213)

$266

$2,086

0.8600

$1,779

3

03/10/12 $35,564

$3,361

$985

$2,376

$452

$690

($238)

$298

$2,316

0.7975

$1,847

4

03/10/13 $39,832

$3,764

$1,103

$2,661

$506

$773

($267)

$334

$2,594

0.7395

$1,919

5

03/10/14 $44,612

$4,216

$1,235

$2,981

$567

$865

($299)

$375

$2,906

0.6858

$1,993

$5,460

$1,600

$3,861

$883

$883

$66,162

0.6858

$45,375

Residual

$45,504

(all dollar values in millions, except earnings per share) 17

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MBA 590 | Spring 2009 | Final Presentation | Agrawal | Birani | Bowles-Carey | Ravi-Kumar | Vachhani

Most-likely case: • Assuming the company’s revenue growth to be 12%, consistent with its historical performance, the mostlikely case is the Intrinsic Share Value of Stock will be $78.35 in five years. Sources: http://moneycentral.msn.com/ investor; http://finance.yahoo.com; http:// valuepro.net


Discounted free cash flows (worst case) Insight

Accenture’s intrinsic share value of its stock would be $68.47 in five years. Accenture 5-year excess return period General pro forma Valuation date: 03/31/09 Discounted excess return period FCFF

$7,888

Total corporate value $55,334

Discounted corporate residual value $39,615

Less debt

($1)

$7,831

Less preferred stock

($0)

Total corporate value $55,334

Less short term liabilites

($5,970)

Short term assets

Total value to common equity $49,362

(1) Period

(2) Fiscal year

(3)

(4)

. Rev NOP

(5)

(6)

Intrinsic value of stock

97)

Adj. taxes NOPAT CAPEX

(8)

(9)

. Deprec.

Net invest.

(10)

$68.47 (11)

Change NWC FCFF

(13)

Disc. factor

Disc. FCFF

0

03/10/09 $25,314

1

03/10/10 $27,592

$2,345

$687

$1,658

$350

$535

($185)

$178

$1,665

0.9273

$1,544

2

03/10/11 $30,076

$2,556

$749

$1,807

$382

$583

($202)

$194

$1,815

0.8600

$1,561

3

03/10/12 $32,782

$2,787

$816

$1,970

$416

$636

($220)

$212

$1,978

0.7975

$1,577

4

03/10/13 $35,733

$3,037

$890

$2,147

$454

$693

($239)

$231

$2,156

0.7395

$1,594

5

03/10/14 $38,949

$3,311

$970

$2,341

$495

$756

($261)

$251

$2,350

0.6858

$1,612

$4,767

$1,397

$3,370

$771

$771

$57,763

0.6858

$39,615

Residual

$39,728

(all dollar values in millions, except earnings per share) 18

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MBA 590 | Spring 2009 | Final Presentation | Agrawal | Birani | Bowles-Carey | Ravi-Kumar | Vachhani

Worst case: • Assuming the company’s revenue growth to be 9%, which is the S&P 500’s predicted earnings, the worst case is the Intrinsic Share Value of Stock will be $68.47 in five years. Sources: http://moneycentral.msn.com/ investor; http://finance.yahoo.com; http:// valuepro.net


Resources http://www.accenture.com/home/default.htm http://www.bearingpoint.com/portal/site/bearingpoint http://www.ibm.com/us/en/ http://www.eds.com/ http://en.wikipedia.org/wiki/Accenture http://en.wikipedia.org/wiki/Arthur_Andersen http://finance.yahoo.com/ http://www.reuters.com/finance/stocks/recommendations?symbol=ACN.N http://www.google.com/finance?q=NYSE%3AACN http://www.marketwatch.com/tools/quotes/snapshot.asp?symb=ACN&pg=analyst <http://www.marketwatch.com/ tools/quotes/snapshot.asp?symb=ACN&amp;pg=analyst> http://quote.morningstar.com/Option/Options.aspx?sLevel=A&ticker=ACN <http://quote.morningstar.com/Option/Options.aspx?sLevel=A&amp;ticker=ACN> http://google.brand.edgar-online.com/DisplayFiling.aspx?TabIndex=2&FilingID=6507381&companyid=85587&ppu=%2 52fdefault.aspx%253fsym%253dACN <http://google.brand.edgar-online.com/DisplayFiling.aspx?TabIndex=2&amp;Fili ngID=6507381&amp;companyid=85587&amp;ppu=%252fdefault.aspx%253fsym%253dACN> http://www.informationweek.com/blog/main/archives/2009/03/bearingpoint_sa.html http://images.google.com/imgres?imgurl=http://www.jeffsweather.com/archives/NH%2520Thunderstorm. jpg&imgrefurl=http://www.jeffsweather.com/archives/2006/07/new_hampshire_t.html&usg=__QOUj3pEKbEI7Wf8ZwJqi1-8NHMA=&h=366&w=550&sz=18&hl=en&start=52&sig2=kMcp2EuFpAHq8zxekh4Teg&um=1&tbnid=oektgJ5C3 NzP9M:&tbnh=89&tbnw=133&prev=/images%3Fq%3Dthunderstorm%26ndsp%3D18%26hl%3Den%26client%3Dsaf ari%26rls%3Den%26sa%3DN%26start%3D36%26um%3D1&ei=SjrSSeeWPML1nQeZzJDGBQ

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MBA 590 | Spring 2009 | Final Presentation | Agrawal | Birani | Bowles-Carey | Ravi-Kumar | Vachhani

Accenture Financial Analysis  

final presentation Managerial Finance