Operational efficiency, reduced expenses in the wake of the coronavirus crisis-induced work-from-home wave, and increased adoption of cloud computing and other emerging technologies bode well for the Zacks Outsourcing industry. These drive competitive advantage, and increase innovation and speed-to-market.
Broadridge Financial Solutions, Inc. (BR - Free Report) , Genpact Limited (G - Free Report) and Conduent Incorporated (CNDT - Free Report) are some stocks, which are likely to gain from the abovementioned industry trends. However, rising data security issues, thanks to increased dependency on technology, are concerns for the industry.
Outsourcing is the practice of transferring control of certain operations, services or processes, previously done by a company’s internal staff or resources, to a third party.
The Zacks Outsourcing industry comprises companies that are engaged in providing information technology, payroll, human resource, retirement and insurance services, business management solutions and business process outsourcing to small and mid-sized companies in the United States and abroad.
4 Trends Shaping the Future of Outsourcing Industry
A Healthy Demand Environment: Increasing demand for expertise in improving efficiency and reducing costs has benefited the industry over the past several years. The industry has witnessed growth in revenues, income and cash flow over the past few years, enabling most players to pursue acquisitions and other investments and pay out stable dividends.
Benefits from the Remote Working Model: The industry has witnessed a shift in its operating model with an increase in the number of remote workers in the wake of the coronavirus crisis-induced work-from-home wave. Despite dealing with all types of operational challenges (related to working from home) such as availability of laptops, Internet connectivity and data-security issues, remote working continues to be a driving force. Also, it is leading to cost savings for many firms by bringing down their spending on real estate. Adoption of remote working should also alter the offshore-onshore delivery capabilities for industry players. This is anticipated to create a hybrid-work-culture (a hybrid model of working from office and home) in the days ahead, which should enhance the talent pool of the industry.
Increased Adoption of Technologies: Most of the industry participants are also considering emerging technologies such as cloud computing to drive competitive advantage, increase innovation, improve speed-to-market and drive performance within the industry. Wider application of artificial intelligence (AI) is expected to be the biggest change due to the pandemic. Adoption of AI should lower complications and simplify operations. This should aid the industry.
Notably, industry players are in the process of modernizing their traditional legacy-oriented business processes in order to keep themselves flexible amid any kind of operating environment.
Rising Security Concerns and Remedies: Coronavirus-led increased dependency on technology has led to growing cases of hacking, identity theft and malicious payload deliveries. With companies shifting to off-location operations and work-from-home models, remote infrastructure vulnerabilities and security gaps are being exploited to secure unauthorized access to proprietary systems and data.
As a preventive measure to enhance data security and ensure cyber-resilience, increased implementation of secure access technologies, such as VPNs, two-factor authentication and other ID and access-management controls for home workers, as well as increased monitoring and threat-detection tools are being used. Outsourced service providers are also updating organizational policies (including Bring Your Own Device and work from home policies) and data breach protocols in order to reduce security risk. Adequate training of employees about emerging threats and data security issues is also being prioritized by several companies.
Zacks Industry Rank Indicates Encouraging Prospects
The Zacks Outsourcing industry, which is housed within the broader Zacks Business Services sector, currently carries a Zacks Industry Rank #33. This rank places it in the top 13% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates continued outperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
Before we present a few stocks that investors can buy or retain given their growth prospects, let’s take a look at the industry’s recent stock market performance and current valuation.
Industry Underperforms Sector and S&P 500
The Zacks Outsourcing Services industry has underperformed the broader Zacks Business Services sector as well as the Zacks S&P 500 composite over the past year.
The industry has declined 13.1% over this period against 0.5% growth of the broader sector and 15.7% increase of the Zacks S&P 500 composite.
One-Year Price Performance
Industry’s Current Valuation
On the basis of forward 12-month price-to-earnings (P/E), which is commonly used for valuing outsourcing stocks, the industry is currently trading at 21.44X compared with the S&P 500’s 22.84X and the sector’s 30.08X.
Over the past five years, the industry has traded as high as 23.66X, as low as 17.32X and at the median of 22.14X, as the charts below show.
Forward 12-month Price-to-Earnings (P/E)
3 Outsourcing Stocks to Keep a Close Eye On
We are presenting three stocks that carry a Zacks Rank #1 (Strong Buy) or 3 (Hold). These stocks are well positioned to grow in the near term. You can see the complete list of today’s Zacks #1 Rank stocks here.
Conduent Incorporated: This Zacks Rank #1 New Jersey-based company provides business process services with capabilities in transaction-intensive processing, analytics, and automation in the United States, Europe, and internationally. The company has been enjoying COVID-19- related benefit in its government business. Improvement in operational and technology performance and reduction in expenses have been aiding the company’s bottom line. Efforts to strengthen client relationships have resulted in improved client retention.
The Zacks Consensus Estimate for current-year EPS has improved more than 100% in the past 60 days. The stock has gained 52.7% over the past six months.
Price & Consensus: CNDT
Broadridge Financial Solutions, Inc.: This Zacks Rank #3 New York-based company provides investor communications and technology-driven solutions for the financial services industry worldwide. Rising demand for technology solutions has enabled the company to increase investments in digital, AI, cloud and blockchain particularly via acquisitions. This is expected to supplement the company’s growth amid coronavirus-induced dependency on technology. Further, the company has a strong business model, backed by higher recurring fee revenues. It has supplemented internal growth with strategic acquisitions and has diversified products and services to support top-line growth. The company is executing well on its growth strategy in governance, capital markets and wealth management.
The Zacks Consensus Estimate for current-year EPS has improved 2.3% in the past 60 days. The stock has gained 47.9% over the past six months.
Price & Consensus: BR
Genpact Limited: This Zacks Rank #3 Bermuda-based company provides business process outsourcing and information technology (IT) services North and Latin America, India, rest of Asia, and Europe.Genpact enjoys a competitive position in the BPO services market based on domain expertise in business analytics, digital and consulting. Acquisitions have been helping in expanding product portfolio and gaining new domain expertise. Artificial Intelligence offers ample growth opportunities amid COVID 19-induced dependency on technology. Consistency in rewarding shareholders through dividend payments and share repurchases boost investor confidence and positively impact earnings per share.
The Zacks Consensus Estimate for current-year EPS has improved 11.4% in the past 60 days. The stock has gained 9% over the past six months.
Price & Consensus: G