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Computer - Integrated Systems Stock Outlook: Short-Term Pain Is Inevitable

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The evolution of Computer – Integrated Systems industry can primarily be attributed to rise of more advanced forms of data management and rapid shift from traditional silos. The increasing demand to integrate deployment techniques and modern application development is augmenting the integrated systems industry. Additionally, factors like business and global expansion, financial efficiency and core competency are fueling growth of Computer – Integrated Systems industry.

We believe that high demand across several small, medium and large-scale enterprises, improving operating leverage through productivity gains and increased investments are likely to drive growth and profitability of the industry, going forward. Moreover, Big Data & business analytics, cloud computing, mobile, security and social business are other reasons to be optimistic about the industry’s prospects in the long haul.

However, near-term growth prospects of Computer – Integrated Systems industry are being called into question owing to the ongoing and heavily time-consuming industry model transition to cloud. Further, foreign exchange volatility is a significant headwind. Moreover, any sluggishness in global economic growth and shift in consumers buying patterns is likely to dampen growth prospects of the industry.

Nonetheless, rising technological advancements such as cloud and virtual technologies are anticipated to favorably impact growth of Computer – Integrated Systems industry in the long term.

Industry Lags on Shareholder Returns

Looking at shareholder returns over the past one year, it appears that the border economic recovery didn’t suffice in enhancing investors’ confidence in the industry’s growth prospects.

The Zacks Computer - Integrated Systems industry, which is a part of the broader Zacks Computer And Technology Sector, has underperformed both the S&P 500 and its own sector over the past year.

While the stocks in this industry have collectively gained 4.3%, the Zacks S&P 500 Composite and Zacks Finance Sector have rallied 16.7% and 17.5%, respectively.

Sector Stocks Look Inexpensive

Despite the underperformance of the industry over the past one year, its valuation picture looks reasonable. One might get a good sense of the industry’s relative valuation by looking at its price-to-earnings ratio (P/E), which is the most appropriate multiple for valuing Computer – Integrated Systems stocks because their earnings are effective in gauging performance.

This ratio essentially measures a stock’s current market value relative to its earnings performance. Investors believe that lower the P/E, higher will be the value of the stock.

The industry currently has a trailing 12-month P/E ratio of 10.98X, which looks quite inexpensive when compared with the market at large, as the trailing 12-month P/E ratio for the S&P 500 is 19.72X and the median level is 20.14X.

 

Earnings Outlook Suggests Constrained Growth

The Zacks Computer – Integrated Systems industry is witnessing a sea change owing to the rapid evolution of cloud platforms as well as entrance of players and latest technologies.

Industry participants are taking every effort to keep pace with ongoing and intensively time-consuming industry model transition to cloud. Although these are expected to drive the top line, increasing foreign exchange volatility and sluggishness in global economy are likely to hurt profitability.

However, what really matters to investors is whether this group has the potential to perform better than the broader market in the quarters ahead.

One reliable measure that can help investors understand the Zacks Computer – Integrated Systems industry's prospects for a solid price performance going forward is its earnings outlook. Empirical research shows that earnings outlook for the industry, a reflection of the earnings revisions trend for the constituent companies, has a direct bearing on its stock market performance.

One could get a good sense of industry's earnings outlook by comparing the consensus earnings expectation for the current financial year with last year's reported number, but an effective measure could be the magnitude and direction of the recent change in earnings estimates.

The Price & Consensus chart for the industry shows the market's evolving bottom-up earnings expectations for it and the industry's aggregate stock market performance. The red line in the chart represents the Zacks measure of consensus earnings expectations for 2019, while the light blue line represents the same for 2018.

 

However, the trend in earnings estimate revisions for the Zacks Computer – Integrated Systems industry has not been favorable lately.

The consensus EPS estimate for the current fiscal year has been revised 0.9% downward since Jun 30, 2018.

 

Zacks Industry Rank Indicates Bleak Near-Term Prospects

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates underperformance in the near term.

The Zacks Computer – Integrated Systems industry currently carries a Zacks Industry Rank #205, which places it at the bottom 20% of 256 Zacks industries. 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.

Our proprietary Heat Map shows that the industry’s rank has continuously deteriorated for the last three weeks.

 

Revenues: Zacks Computer – Integrated Systems

The past revenue of the Computer – Integrated Systems space reveals that the group has been witnessing quite a roller-coaster trend. It’s worth noting that from the end of 2015, the industry’s revenues started to decline and persisted in entire 2016.

However, from the beginning of 2017, the industry’s revenues began rising and showed an upward trend in 2018.

 

Gross Margins: Zacks Computer – Integrated Systems

The gross margins performance of the Zacks Computer – Integrated Systems industry also exhibits similar trends as revenues. From the figure below, it can be seen that gross margins began rising from December 2015. The same started to decline sharply since the beginning of 2016 and persisted in 2017 and 2018.

 

Bottom Line

Sluggishness in global economic growth and shift in consumers buying patterns could weigh on the prospects of the Computer – Integrated Systems industry. Below are three stocks that carry a Zacks Rank #3 (Hold) that we would recommend investors to hold the stocks for the time being.

(You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.)

IBM Corp. (IBM - Free Report) : The company has been witnessing positive revisions in earnings estimates over the last 60 days. Analysts have revised estimates upward by 2 cents for the current year. Further, the Zacks Rank #3 stock has a long-term expected EPS growth rate of 4.97%.

Hewlett Packard Enterprise Company (HPE - Free Report) : The company has been seeing a stable earnings estimates over the last 30 days. Analysts haven’t revised any estimates upward for the current year. Further, the Zacks Rank #3 stock has a long-term expected EPS growth rate of 9.34%.

 

Iteris, Inc. (ITI - Free Report) : The company has been witnessing a stable earnings estimates over the last 60 days. Analysts haven’t revised any estimates upward for the current year. Further, the Zacks Rank #3 stock has a long-term expected EPS growth rate of 10%.

 

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