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3 Computer Services Stocks to Watch in a Challenging Industry

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Increased adoption and success of the work-from-home trend are enabling the Zacks Computer - Services industry to cater to increasing demand for cloud-enabled software solutions. Also, increasing adoption of digital transformative techniques in healthcare and financial services remains the silver lining for these industry participants. However, the industry is still significantly weak compared with the pre-pandemic level.

CACI International, Inc. (CACI - Free Report) , ManTech International (MANT - Free Report) and WidePoint Corporation (WYY - Free Report) are well positioned to benefit from the above-mentioned positives. Growing adoption of cyber security solutions, stringent regulatory requirements, digital healthcare and the need for business automation solutions should continue to drive the industry’s growth.

Industry Description

The Zacks Computer - Services industry primarily comprises companies that offer cloud and software-based solutions. Their offerings include national security solutions, business support solutions, and systems engineering as well as software application development solutions.

The industry participants cater to varied end markets and customers including intelligence, defense, U.S. government agencies, communications, banking, financial services, insurance, healthcare, as well as media and entertainment.

What’s Shaping the Future of the Computers – Services Industry?

Remote Work & Online Learning Trends Boost Prospects: The industry’s growth is expected to accelerate in the days ahead on increasing number of remote workers in the wake of coronavirus-induced work-from-home wave. In this era of digital transformation, enterprises are actively seeking a common ground between on-premise and cloud infrastructures that will enable them to provide flexible, as well as easily adoptable hybrid solutions. Coronavirus-induced remote working has led to increased demand for cloud and cost-efficient business support solutions, as well as other digital monetization solutions, which bode well for the industry.

Growing Cyber Attacks is a Tailwind: Increasing number of cyber attacks and related security risks are expected to keep the industry’s momentum alive. Government agencies are ideal targets for cyber attacks, as they are entrusted with sensitive information. Therefore, the growing need for cyber security solutions and services in critical areas like defense, intelligence and civilian agencies of the U.S. government bodes well for the industry players.

Regulatory Compliance Drives Demand: The companies in this industry should benefit from increasingly complex network systems, and sensitive information environments in which governments as well as businesses operate. The industry participants are keeping pace with global regulatory and business practice requirements, thereby helping customers incorporate the best practices while complying with governmental and industry norms.

Zacks Industry Rank Indicates Dull Prospects

The Zacks Computer - Services industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #195, which places it in the bottom 23% 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 bleak 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 - Services industry has underperformed both the Zacks S&P 500 composite, and the broader Zacks Computer and Technology sector in the past year.

The industry has declined 3.8% over this period against the S&P 500 and broader sector’s rally of 18.5% and 42.8%, respectively.

One-Year Price Performance

Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings, which is a commonly used multiple for valuing computer services stocks, the industry is currently trading at 17.99X versus the S&P 500’s 22.92X and sector’s 29.06X.

Over the past five years, the industry has traded as high as 25.16X, as low as 13.67X and at a median of 20.25X, as the charts below show.

Price-to-Earnings (P/E) Ratio (F1)

Price-to-Earnings (P/E) Ratio (F1)

3 Computer Services Stocks to Keep a Close Eye on

CACI International, Inc.: The company is benefiting from new business wins and organic expansions. It has a large pipeline of new projects and continues to win deals at regular intervals. Furthermore, having the government as a big client lends stability to the business and moderates revenue fluctuations.

Further, this Zacks Rank #2 (Buy) company is well positioned to benefit from an uptick in cash flows, government contracts and strategic partnerships. Notably, CACI International has declined 14% in the past year.

The Zacks Consensus Estimate for fiscal 2021 earnings has been revised 1.1% upward to $15.16 per share over the past 30 days.

Price and Consensus: CACI

ManTech International Corporation: It is a provider of IT and technical services solutions to the U.S. federal government. The company is well poised to capitalize on accelerating need for cyber services among U.S. embassies all over the world, new contract wins, strong backlog and extension of the existing contracts. Further, merger and acquisition activity has been supplementing its growth over the past few years.

Shares of ManTech International have gained 2.7% in the past year. This Zacks Rank #3 (Hold) company is likely to gain from improving government spending on defence. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Notably, the Zacks Consensus Estimate for 2020 earnings has remained stable at $3.27 per share over the past 60 days.

Price and Consensus: MANT

WidePoint Corporation: It is a provider of products and services to the government sector and commercial markets. The company is benefiting from federal contract wins and contract extensions. Also, expansions with other federal government customers are driving its growth.

Further, this Zacks Rank #3 company is benefiting from the strategic vendor agreement with SYNNEX Corporation. The deal will potentially expand channels for reselling credentials.

Notably, WidePoint has gained 189.1% over a year. The Zacks Consensus Estimate for 2020 earnings has remained stable at 30 cents per share over the past 60 days.

Price and Consensus: WYY


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CACI International, Inc. (CACI) - free report >>

WidePoint Corporation (WYY) - free report >>

ManTech International Corporation (MANT) - free report >>