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Accenture PLC (ACN), the consulting and AI business processes company, reported higher quarterly free cash flow (FCF) and raised its FCF guidance for this year. This implies that ACN stock remains undervalued. One way to play this is short out-of-the-money puts to set a lower buy-in.
ACN is at $296.72 in midday trading on Monday, June 30. That is still well below its high of $398.25 on Feb. 5. This article will show why ACN has further to rise, almost 20% to $355 per share.
Strong Free Cash Flow (FCF)
Accenture reported on June 20 that its revenue rose 7.66% YoY to $17.725 billion for its fiscal Q3 ending May 31. That was driven by demand for generative AI from customers and its ongoing consulting and managed services business.
Accenture also guided that it expects this fiscal year (ending Aug. 2025) revenue to be up by 6-7% (in local currency). That is higher than the previous outlook of a 5-7% raise.
Moreover, Accenture is one of the few companies that not only reports its free cash flow (FCF) but also provides FCF guidance.
For example, its latest guidance is that it will produce between $9.0 billion and $9.7 billion in FCF for this fiscal year. That is up from $8.8 billion to $9.5 billion just 3 months ago, as seen in the table Accenture provided on page 5 of its release.
In other words, Accenture's FCF margin (FCF/revenue) is likely to rise over the next year. We can use this to project its forward FCF next year.
Here is how that works. Seeking Alpha's data shows that over the trailing 12 months (TTM) ending May 31, it generated almost $10.5 billion in operating cash flow (OCF). After deducting $2 billion in capex, its TTM FCF was $8.5 billion.
Based on $68.48 billion in TTM revenue, its TTM OCF margin was 15.3%:
$10.5 billion OCF/$68.48 billion = 0.1533 = 15.3% OCF margin
We can use that OCF margin estimate to forecast next fiscal year's FCF. For example, analysts now project revenue will rise to $73.15 billion. That implies its OCF margin could rise as well:
17% x $73.15 billion revenue = $12.435 billion Operating Cash Flow (OCF) next year
After deducting $600 million each quarter ($2.4 billion annually) in capex, its FCF is forecast to rise:
$12.435b - $2.4b capex = $10.035 billion in FCF
In other words, there is good reason to believe management's guidance could lead to a $10 billion FCF year next year.
That could push ACN stock higher. Let's see why.
Price Targets for ACN Stock
One way to value a stock using a free cash flow forecast is to assume that 100% of FCF is paid out in dividends. That means we can estimate its dividend yield using its FCF.
For example, in the last year, Accenture generated $8.5 billion in FCF, and its market cap today is $185.628 billion, according to Yahoo! Finance. So, its TTM FCF yield is:
$8.5b / $185.628b = 0.04579 = 4.58% FCF yield
If ACN generates $10 billion in FY 2026 FCF, as we have shown above, its FCF yield is likely to improve a bit to 4.50%. Here is how that works out:
$10.0 b FCF estimate / 0.045 = $222.222 billion valuation
That is almost 20% higher than today's market cap:
$222.22 b / $185.628b -1 = 1.197 = +19.7% upside
In other words, ACN stock is worth 19.7% more, or $355 per share:
$296.72 price today x 1.197 = $355.17 target price
Analysts Agree. Yahoo! Finance reports that 25 analysts covering ACN stock have an average price target of $340.80 per share. That is close to my $355 price target. Similarly, Barchart's mean survey price target is $347.91, which is even closer to my price target.
Moreover, AnaChart.com, which tracks sell-side analysts who have written recently on a stock, shows that 23 analysts have an average price target of $337.32.
The bottom line is that analysts also believe ACN stock is still undervalued here.
Investors can set a lower buy-in price by shorting out-of-the-money (OTM) put options in near-term expiry periods. That way, they can get paid while waiting for a lower price.
Shorting OTM Puts
For example, the Aug. 1 expiry period, over one month away, shows that a 4.2% lower put strike price, $285.00, has a $3.35 midpoint premium.
That means a short seller can make an immediate 1.17% short-put yield: $3.35/$285.00 = 0.01175
That is a good way to set a lower buy-in price and still get paid a 1.17% monthly yield. Moreover, for investors willing to take on more risk (i.e., the delta ratio is higher - see above), the $290 strike price put has a midpoint premium of $4.80.
That gives an investor an immediate short put yield of 1.66% (i.e., $4.80/$290.00 = 0.01655). So, using a 50/50 mix of these two trades, an investor could potentially make around a 1.415% monthly yield.
If the investor can repeat that for the next 3 months, the expected return (ER) is 5.66% (i.e., 1.415% x 3). There is no guarantee this can occur. But it does show that one profitable way to play ACN is to sell short out-of-the-money (OTM) puts.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
