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3 Stocks to Watch in a Challenging Technology Solutions Industry

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The coronavirus pandemic-led macroeconomic downturn has impacted the Zacks Computer – Integrated Systems industry negatively. Supply chain disruptions, destabilization of international trade and significant delays in customer acceptance have resulted in high levels of backlog and cast a shadow on the industry’s prospects.

Nonetheless, International Business Machines (IBM - Free Report) , Hewlett Packard Enterprise (HPE - Free Report) and NCR Corporation (NCR - Free Report) are a few industry participants to watch as they are expected to benefit from the rise in advanced forms of data management, rapid shift from traditional silos, increased demand for integration of deployment techniques, as well as modern application development.

Industry Description

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. Moreover, the industry players are anticipated to benefit from slow yet recovering global IT spending, as predicted by Gartner.

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: Due to coronavirus-led 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, 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 Bleak Prospects

The Zacks Computer – Integrated Systems industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #212, which places it in the bottom 16% 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 underperformance 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.

The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic on this group’s earnings growth potential. Since Nov 30, 2020, the industry’s earnings estimates for 2021 have moved down 13.8%.

Despite the gloomy industry outlook, a few stocks have the potential to outperform the market based on a strong earnings outlook. 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 8.1% over this period against the S&P 500 and broader sector’s respective rally of 26.7% and 48.4%.

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 1.42X compared with the S&P 500’s 5.18X. It is also below the sector’s trailing 12-month P/S of 6.03X.

Over the past five years, the industry has traded as high as 2.36X and as low as 0.93X, with the median being at 1.48X, as the charts below shows.

Trailing 12-Month Price-to-Sales (P/S) Ratio

3 Computer-Integrated Systems Providers to Watch

NCR Corporation: This Zacks Rank #3 (Hold) company offers payments processing, multi-vendor connected-device services, automated teller machines, point of sale terminals and self-service technologies.

The coronavirus-induced rapid adoption of digital banking solutions bodes well for NCR. Notably, the company has received a positive feedback from customers on the new features and functionality of its solutions. It has also begun witnessing higher growth. You can see the complete list of today’s Zacks #1 Rank stocks here.

Moreover, the acquisition of Cardtronics is anticipated to drive the acceleration of NCR-as-a-service strategy. Cardtronics’ robust debit network will further expand NCR’s payments platform and help it connect to retail and bank customers, thereby facilitating customer acquisition.

Further, the addition of recently acquired Freshop’s e-commerce solutions to NCR’s platform will enable faster deployment of buy-online, pickup-in-store capabilities for retailers, including regional and small grocery chains.

Freshop’s e-commerce solution will become a key element of NCR’s Next-Generation Retail Store Architecture, including NCR Emerald. Notably, NCR Emerald simplifies store operations for retailers. The acquisition is further expected to boost its performance owing to the addition of new capabilities.

However, growing competition from companies like Diebold and Fidelity makes us cautious about the segment’s near-term performance. NCR’s shares have declined 2.2% year to date.

The Zacks Consensus Estimate for 2021 earnings has been upwardly revised by 2.4% over the past 30 days to $2.52 per share.

Price and Consensus: NCR

International Business Machines: This Zacks Rank #3 company is benefiting from solid adoption and robust pipelines across hybrid cloud and data platform, AI solutions, in Cognitive Apps business driven by strength in Cloud Paks and Security, cloud-based transformation services in the Global Business Services (GBS) segment and App modernization offerings.

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, the growing clientele of IBM Q Network is a positive.

The Zacks Consensus Estimate for 2021 earnings has remained stable at $11.17 per share over the past 30 days. IBM’s shares have declined 2.1% year to date.

Price and Consensus: IBM

Hewlett Packard Enterprise: HPE is benefitting from improved supply-chain execution and higher demand for its cloud services owing to the ongoing digital transformation.

HPE’s efforts to shift focus on higher-margin offerings like Intelligent Edge and Aruba Central Hyperconverged Infrastructure are aiding the bottom line. HPE’s shares have increased 25.2% year to date.

The acquisition of Silver Peak, an SD-WAN (Software-Defined Wide Area Network) leader, is expected to add enhancements to Aruba ESP cloud solutions and drive expansion of the company’s enterprise clientele.

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 have been shifting to cloud computing owing to their maintenance-free and cost-effective structure compared with standalone servers, which can undermine this Zacks Rank #3 company’s near-term prospects.

Notably, the Zacks Consensus Estimate for 2021 earnings has remained steady at $1.59 per share over the past 30 days.

Price and Consensus: HPE


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