Top Picks 2016: Accenture plc

01/29/2016 7:00 am EST

Focus: STOCKS

Brian Lazorishak, CFA, CMT

Senior Portfolio Manager, Stack Financial Management

Our Top Pick for growth in 2016 is a firm that provides management consulting, technology, and outsourcing services worldwide, explains Brian Lazorishak, portfolio manager of Stack Financial Management and contributing editor of InvesTech Market Analyst.

Accenture plc (ACN) employs extensive experience and comprehensive capabilities across a wide range of industries and business functions to help clients integrate systems and improve performance.

The diversity of Accenture's business along industry, product offering, and geographic lines is a key competitive advantage and creates a business model that is highly resilient and durable, with deep, long-term relationships.

Accenture currently serves more than 80% of the Fortune Global 500 and 94 of the top 100. All of the company's largest 100 clients have been on board for at least five years and 97 of those 100 have been clients for at least ten years.

It is a global company with 47% of revenues in North America, 36% in Europe, and the remaining 17% in growth Markets.

Continued execution of this strategy has led to consistent double-digit growth. This stands out in the Technology sector, where even some of the best growth companies are subject to cyclical earnings.

Over the last ten years, Accenture has grown earnings at an annualized rate of 15.5% and revenues at an average of 12.5% annually. Since going public in 2001, the company has increased earnings every fiscal year.

The current outlook for the company is appealing. Growth has been muted somewhat by the strong US dollar, but Accenture has continued to expand despite this substantial headwind.

While year-over-year revenue has been flat in US dollar terms, it has been growing about 10% when foreign sales are measured in local currency.

Most of the growth is in what the company refers to as the new digital, cloud, and security services. The company's goal in this area is to “enable clients to be the digital disruptors, not the disrupted.” ACN continues to invest in developing these growth areas, including through acquisitions.

Accenture is very healthy financially. ACN generated $3.7 billion in free cash flow (FCF) in fiscal 2015 (ended August 31) for a FCF yield of 5.2%.

In fiscal 2016, the company will pay $2.20 in dividends (roughly 2% yield) and the dividend has grown over 20% annually since initiated in 2006. Accenture has over $3 billion in cash on the balance sheet, with virtually no debt.

Accenture has delivered strong and consistent growth, especially for a technology company. As such, it trades at a premium P/E ratio of about 20 based on fiscal 2016 earnings per share of $5.20. Yet, this higher valuation is still attractive given the resiliency of the business model and consistency of earnings.

Accenture offers a rare combination of growth and stability in the Technology sector, making it a timely portfolio idea for 2016.

Note: Clients and individuals associated with Stack Financial Management hold positions in—and may from time to time make purchases or sales of—this security.

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