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3 Stocks to Watch Out For From the Promising Outsourcing Space

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Increased adoption of cloud computing and other emerging technologies, operational efficiency and reduced expenses in the wake of the coronavirus crisis-induced work-from-home wave have been driving competitive advantage and increasing innovation and speed-to-market. These factors bode well for the Zacks Outsourcing industry.

Paychex, Inc. (PAYX - Free Report) , Broadridge Financial Solutions, Inc. (BR - Free Report) and Genpact Limited (G - Free Report) are some stocks, which are likely to gain from the abovementioned industry trends. On the contrary, issues related to data security on the back of increased dependency on technology remain a major concern.

Industry Description

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.

What’s Shaping the Future of Outsourcing Industry?

A Healthy Demand Environment: Increasing demand for expertise in improving efficiency and reducing costs have 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.

Rising Dependency on 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.

Growing Security Issues 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 are 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 #118. This rank places it in the top 47% 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 retain given their growth prospects, let’s take a look at the industry’s recent stock market performance and current valuation.

Industry’s Performance

The Zacks Outsourcing Services industry has outperformed the broader Zacks Business Services sector but underperformed the Zacks S&P 500 composite over the past year.

The industry has declined 3.1% over this period compared with 10.6% decline of the broader sector. The Zacks S&P 500 composite has however risen 16.3% in the said time frame.

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 22.76X compared with the S&P 500’s 23X and the sector’s 29.55X.

Over the past five years, the industry has traded as high as 24.23X, 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 #3 (Hold) and are well positioned to grow in the near term. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Paychex: This New York-based company provides integrated human capital management solutions for human resources (HR), payroll, benefits, and insurance services for small- to medium-sized businesses in the United States and Europe.

Despite continuous impact of the COVID-19 pandemic, the company continued to enjoy solid client retention. Paychex remains focused on offering excellent customer service, human resource ("HR") expertise and product innovations to help clients amid the pandemic. Additionally, cost-saving initiatives have resulted in sequential improvement of margins. Acquisitions have expanded the company's customer base and generated cost and revenue synergies. Further, the company strives to capitalize on the rising opportunities in the professional employer organization industry. 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 3.9% in the past 60 days. The stock has gained 21% over the past six months.

Price & Consensus: PAYX

Broadridge Financial Solutions: This 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 2.8% in the past 90 days. The stock has gained 16.1% over the past six months.

Price & Consensus: BR

 

Genpact: This Bermuda-based company provides business process outsourcing and information technology services in North and Latin America and parts 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 it to expand its product portfolio and gain new domain expertise. Artificial intelligence offers ample growth opportunities amid COVID-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 2.4% in the past 90 days. The stock has gained 7.2% over the past six months.

Price & Consensus: G

 

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