Analysts have been tripping over themselves to hike price targets on Accenture Plc (NYSE:ACN) after the technology consulting firm clobbered estimates last quarter, and now ACN stock is looking overheated.
Pacific Crest Securities was the latest name to take a more optimistic view of ACN stock. Analysts on Monday reaffirmed their overweight (buy, essentially) rating on Accenture stock and lifted their target price to $130 from $129.
ACN stock has been a great bet in 2016, with a year-to-date gain of more than 15%. Last week’s earnings report shows why. The company is ahead of its peers in innovation and it is taking market share. As a Barclay’s analyst said in a note to clients last week:
“This quarter solidifies our view that ACN is well ahead of its peers in next generation solutions. Its sustained focus and investment in ‘The New’ gives us further confidence that ACN will continue to gain market share as clients continue to shift spend toward growth initiatives.”
However, Barclay’s only maintained its equal weight (hold) recommendation on ACN stock. True, the research shop took its target price up to $120 from $116, but that’s well below Wall Street’s average target of $129. Pacific Crest on Monday raised its price target to $130.
And that’s as far as all these good feelings for Accenture stock extend. An average target price of $129 implies upside of only about 6% in the next 12 months or so. That’s a hold in most analysts’ books.
ACN Is Not a Cheap Stock
The issue, more than anything, is valuation. The solid run in ACN stock has put it ahead of its growth rate. From analysts at Citi Research last week:
“Much as we admire and applaud Accenture’s track record of performance, we are unwilling to recommend that new money be put to work in a name that delivers ~10 percent EPS CAGR but trades at 20x forward earnings.”
Indeed, with a target price of just $120, Citi is saying that ACN is destined to pull back.
Citi make’s a good point. Accenture stock does look a bit rich. On a forward earnings basis, ACN trades at an 18% premium to its five-year average, according to data from Thomson Reuters Stock Reports. The stock trades significantly above its long-term price-to-sales multiple too.
As well as Accenture is doing these days — and as fashionable as ACN stock has become — it would be risky for new money to chase performance at current levels. The growth prospects simply don’t justify the premium investors are willing to pay for them.
Of the 30 analysts covering Accenture stock, 17 call it a buy and 13 have it at hold. Don’t be surprised if some of the “buy” analysts start to downgrade this name solely based on valuation.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
