The Zacks Computer – Integrated Systems industry has suffered immensely from coronavirus-led supply chain disruptions and destabilization of international trade. Lockdowns and shelter-in-place guidelines aimed at flattening the infection curve have caused significant delays in customer acceptance, in turn resulting in high levels of backlog.
Nonetheless, International Business Machines (IBM - Free Report) , Hewlett Packard Enterprise (HPE - Free Report) , NCR Corporation (NCR - Free Report) and Agilysys (AGYS - Free Report) are a few industry participants set to benefit from the rise in advanced forms of data management, rapid shift from traditional silos, increased demand to integrate deployment techniques, as well as modern application developments.
The Zacks Computer – Integrated Systems industry comprises companies that provide advanced information technology solutions, including computer systems, software, storage systems and microelectronics.
Some of the industry participants also provide technological solutions (both products and services) to aid organizations in connecting, interacting and transacting with customers. There are others that develop and market information recognition, data entry software, systems, as well as technologies.
4 Computer – Integrated Systems Industry Trends to Watch Out For
Integrated Solutions Driving Demand: The industry is benefiting from rising demand for integrated solutions across small, medium and large-scale enterprises, along with increasing investments in IoT, big data, AI and blockchain software technologies. Moreover, business analytics, cloud computing, mobile, and security and social businesses present significant opportunities to increasing number of remote workers in the wake of the coronavirus-induced work-from-home wave.
Solid Adoption of Multi-Cloud Model: Growing adoption of the multi-cloud model to achieve better scalability and attain improved resource utilization is also expanding the scope of the industry participants. Cloud and hardware/software virtual technologies are anticipated to favorably impact the industry. As growth and investment opportunities in developed countries continue to slow down, we believe that emerging economies will play a crucial role in the days ahead.
Coronavirus Hurts Supply and Demand: The industry’s near-term prospects look gloomy, attributable to global business disruptions caused by coronavirus-led lockdown. Due to uncertainty over global economic and business activities, industry participants are likely to witness supply constraints, softness in server demand and cognitive applications, as well as delays in customer acceptance, in turn resulting in high levels of backlog, particularly in Compute, High Performance Computing & Mass Storage Class and Storage. Moreover, the industry players are anticipated to bear the brunt of slowdown in IT spending, as predicted by IDC. Also, volatility in foreign exchange — primarily due to the current macro-economic scenario and headwinds in the emerging markets — does not bode well for the industry.
Sluggish IT Spending Mars Prospects: Industry participants are facing challenges owing to the ongoing and heavily time-consuming business model transition to cloud. Further, lower spending across Data-Center Systems — primarily due to component shortages like memory and CPUs, as well as deceleration in hyperscale spending — is likely to dampen the prospects of the industry participants.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Computer – Integrated Systems industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #80, which places it in the top 31% 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 bullish near-term prospects. 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 you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Lags Sector and S&P 500
The Zacks Computer – Integrated Systems industry has underperformed the broader sector and Zacks S&P 500 composite over the past year.
The industry has declined 12.9% over this period against the S&P 500 and broader sector’s respective rally of 19.4% and 42.8%.
One-Year Price Performance
Industry’s Current Valuation
On the basis of trailing 12-month P/S, which is a commonly used multiple for valuing computer integrated systems stocks, we see that the industry is currently trading at 1.27X compared with the S&P 500’s 4.46X. It is also below the sector’s trailing 12-month P/S of 5.27X.
Over the past five years, the industry has traded as high as 2.39X and as low as 0.62X, with the median being at 1.49X, as the charts below shows.
Trailing 12-Month Price-to-Sales (P/S) Ratio
4 Computer-Integrated Systems Providers to Watch
NCR Corporation: This Zacks Rank #1 (Strong Buy) company offers payments processing, multi-vendor connected-device services, automated teller machines, point of sale terminals and self-service technologies.
The coronavirus outbreak, which has forced most of the world into a lockdown, is driving the adoption of digital banking solutions, which bodes well for NCR. Notably, the company has received a positive feedback from customers on the new features and functionality of these solutions. It has also begun witnessing higher growth. You can see the complete list of today’s Zacks #1 Rank stocks here.
However, growing competition from companies like Diebold and Fidelity makes us cautious about the segment’s near-term performance. NCR’s shares have declined 36.1% year to date.
The Zacks Consensus Estimate for 2020 earnings has been upwardly revised by 5.3% over the past 30 days to $1.60 per share.
Price and Consensus: NCR
Agilysys: The company operates as a developer and marketer of hardware and software products as well as services, with special expertise in select vertical markets, including retail and hospitality in North America, Europe, the Asia-Pacific and India.
The Zacks Rank #2 (Buy) company’s expertise in enterprise architecture and high availability, infrastructure optimization, storage and resource management, as well as business continuity is a major growth driver.
The consensus mark for 2020 earnings has moved 49.2% south to 31 cents per share over the past 30 days. Agilysys’ shares have returned 5% year to date.
Price and Consensus: AGYS
International Business Machines Corporation: This Zacks Rank #3 (Hold) company is benefiting from solid adoption of cloud computing, mobile, analytics, cognitive technologies and AI-related solutions.
The Red Hat acquisition, in particular, helped IBM in strengthening competitive position in the hybrid cloud market. Owing to the buyout, the company offers Linux operating system — Red Hat Enterprise Linux — and hybrid cloud platform — Red Hat OpenShift — that aids enterprises with digital transformation.
Further, IBM has been striving to enhance efficiency of blockchain solutions, and quantum computing systems as well as services. In this respect, growing clientele of IBM Q Network remains a positive.
The Zacks Consensus Estimate for 2020 earnings has remained stable at $11.06 per share over the past 30 days. IBM’s shares have declined 6.7% year to date.
Price and Consensus: IBM
Hewlett Packard Enterprise: HPE’s efforts to shift focus on higher-margin offerings like Intelligent Edge and Aruba Central Hyperconverged Infrastructure are aiding the bottom line.
Additionally, its target of saving at least $800 million annually by fiscal 2022-end through the cost optimization plan is a positive. Moreover, its multi-billion-dollar investment plan across expanding networking capabilities will help diversify the business from server and hardware storage markets, as well as boost margins in the long run.
However, organizations are pushing back their investments in big and expensive technology products due to global economic slowdown concerns, which can undermine the Zacks Rank #3 company’s near-term prospects. HPE’s shares have declined 38.3% year to date.
Notably, the Zacks Consensus Estimate for 2020 earnings has remained steady at $1.32 per share over the past 30 days.
Price and Consensus: HPE