Accenture: Valuation Using Cash Flows Kevin Overholt 2/5/2014
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. • Current share price is $78.08 with a market cap of $63.06 billion.
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
Free Cash Flows FCF = EPAT – ΔNEA
Free Cash Flows FCF = EPAT – Δ Net Receivables
Forecast of FCF Growth Rate of FCF: 10.1%
Forecast Beyond 2017 • Accenture is a technology consulting firm, inherently difficult to value in the long-term future. There are many extraneous variables including but not limited to: • Future demand for technology consulting • Explosive growth of complicated technology systems • Ability for Accenture to grow in developed markets • Ability for Accenture to grow in developing markets • Additional sources of revenue for Accenture • Threat of competitors/new entrants to market • Estimated growth rate beyond 2017: 8% • Estimate of enterprise cost of capital: 10%
Forecast Beyond 2017 • Estimated Growth beyond 2017: 8% • Estimate of Enterprise Cost of Capital: 10%
DCF Model Accenture Current Market Cap: $63.06 billion
Limitations of DCF Model • Unknown Enterprise Cost of Capital (As of Module 5) • Large assumptions made about future growth • Future margins and EPAT are also assumptions • Cyclical nature of consulting firms is unaccounted for • Increased uncertainty in independence regulation of Big 4 Consulting branches.