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3 Stocks Worth Buying 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.
Genpact Limited(G - Free Report) , Conduent Incorporated (CNDT - Free Report) and Barrett Business Services, Inc. (BBSI - Free Report) are some stocks, which are likely to gain from the abovementioned industry trends. On the contrary, issues related to data security as a result 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 the company’s internal staff and resources, to external resources or third-party contractors to improve operating efficiency by focusing on core business competencies. The Zacks Outsourcing industry comprises companies that are engaged in providing human capital management solutions, business management solutions, and information technology solutions for human resource, payroll, benefits, retirement and insurance services to small- and medium-sized businesses. Some industry participants also provide business process services with capabilities in transaction-intensive processing, analytics, and automation in the United States and abroad.
What's Shaping the Future of the Outsourcing Industry?
A Healthy Demand Environment: Increasing demand for expertise in improving efficiency and reducing costs has 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. The wider application of artificial intelligence (AI) is expected to be the biggest change due to the pandemic. The 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 in 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, secure access technologies, such as VPNs, two-factor authentication, and other ID and access-management controls for home workers, as well as monitoring and threat-detection tools are being increasingly deployed. 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 is 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 #22. This rank places it in the top 9% 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.
The buy-side analysts covering the companies in this industry have been increasing their estimates. Over the past year, the industry’s consensus earnings estimate for the current year has increased 11.9%.
Before we present a few stocks that investors can buy given their growth prospects, let’s take a look at the industry’s recent stock market performance and current valuation.
Industry Outperforms Sector and S&P 500
The Zacks Outsourcing industry has outperformed the broader Zacks Business Services sector as well as the Zacks S&P 500 composite over the past year.
The industry has gained 38.5% over this period against 12.3% decline of the broader sector. The Zacks S&P 500 composite has risen 30.4% 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 29.98X compared with the S&P 500???s 24.71X and the sector???s 32.23X.
Over the past five years, the industry has traded as high as 31.75X, as low as 20.37X and at the median of 26.93X, as the charts below show.
Conduent: This New Jersey-based company provides business process services with capabilities in transaction-intensive processing, analytics, and automation in the United States, Europe, and internationally. The company's top line has been benefiting from increased volumes in its government payments and transportation segments and new business ramp-up. Improvement in operational performance and reduction in expenses have been aiding the company's bottom line. The company raised its 2021 revenue guidance to the range of $4.1-$4.175 billion compared with the prior guidance of $4.05-$4.15 billion.
The Zacks Consensus Estimate for current-year EPS has improved 7.8% in the past 90 days. The stock has gained more than 100% over the past year.
Price & Consensus: CNDT
Barrett Business Services: This Washington-based company provides business management solutions for small and mid-sized companies in the United States. The company has been doing well on the back of rise in average worksite employees. Improvement in operational performance has been aiding the company's bottom line. The company now expects its 2021 gross billings to register 6-8% growth compared with the prior expectation of 5-7%.
The Zacks Consensus Estimate for current-year EPS has improved 10.5% in the past 90 days. The stock has gained 49.3% over the past year.
Price & Consensus: BBSI
Genpact Limited: This Bermuda-based company provides business process outsourcing and IT services in North and Latin America, India, the rest 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.
For 2021, the company has raised its guidance. Adjusted EPS is currently anticipated in the range of $2.36-$2.39 per share compared with the previous guidance of $2.27-2.30 per share. The Zacks Consensus Estimate of $2.39 lies in line with the higher end of the updated guidance. Revenues are anticipated between $3.96 and $4 billion compared with the prior guidance of $3.93 to $3.99 billion. The Zacks Consensus Estimate of $3.99 billion lies within the updated guidance.
The Zacks Consensus Estimate for current-year EPS has improved 3.9% in the past 90 days. The stock has gained 23% over the past year.
Price & Consensus: G
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3 Stocks Worth Buying From the Promising Outsourcing Space
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.
Genpact Limited(G - Free Report) , Conduent Incorporated (CNDT - Free Report) and Barrett Business Services, Inc. (BBSI - Free Report) are some stocks, which are likely to gain from the abovementioned industry trends. On the contrary, issues related to data security as a result 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 the company’s internal staff and resources, to external resources or third-party contractors to improve operating efficiency by focusing on core business competencies. The Zacks Outsourcing industry comprises companies that are engaged in providing human capital management solutions, business management solutions, and information technology solutions for human resource, payroll, benefits, retirement and insurance services to small- and medium-sized businesses. Some industry participants also provide business process services with capabilities in transaction-intensive processing, analytics, and automation in the United States and abroad.
What's Shaping the Future of the Outsourcing Industry?
A Healthy Demand Environment: Increasing demand for expertise in improving efficiency and reducing costs has 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. The wider application of artificial intelligence (AI) is expected to be the biggest change due to the pandemic. The 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 in 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, secure access technologies, such as VPNs, two-factor authentication, and other ID and access-management controls for home workers, as well as monitoring and threat-detection tools are being increasingly deployed. 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 is 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 #22. This rank places it in the top 9% 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.
The buy-side analysts covering the companies in this industry have been increasing their estimates. Over the past year, the industry’s consensus earnings estimate for the current year has increased 11.9%.
Before we present a few stocks that investors can buy given their growth prospects, let’s take a look at the industry’s recent stock market performance and current valuation.
Industry Outperforms Sector and S&P 500
The Zacks Outsourcing industry has outperformed the broader Zacks Business Services sector as well as the Zacks S&P 500 composite over the past year.
The industry has gained 38.5% over this period against 12.3% decline of the broader sector. The Zacks S&P 500 composite has risen 30.4% 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 29.98X compared with the S&P 500???s 24.71X and the sector???s 32.23X.
Over the past five years, the industry has traded as high as 31.75X, as low as 20.37X and at the median of 26.93X, 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 #2 (Buy) 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.
Conduent: This New Jersey-based company provides business process services with capabilities in transaction-intensive processing, analytics, and automation in the United States, Europe, and internationally. The company's top line has been benefiting from increased volumes in its government payments and transportation segments and new business ramp-up. Improvement in operational performance and reduction in expenses have been aiding the company's bottom line. The company raised its 2021 revenue guidance to the range of $4.1-$4.175 billion compared with the prior guidance of $4.05-$4.15 billion.
The Zacks Consensus Estimate for current-year EPS has improved 7.8% in the past 90 days. The stock has gained more than 100% over the past year.
Price & Consensus: CNDT
Barrett Business Services: This Washington-based company provides business management solutions for small and mid-sized companies in the United States. The company has been doing well on the back of rise in average worksite employees. Improvement in operational performance has been aiding the company's bottom line. The company now expects its 2021 gross billings to register 6-8% growth compared with the prior expectation of 5-7%.
The Zacks Consensus Estimate for current-year EPS has improved 10.5% in the past 90 days. The stock has gained 49.3% over the past year.
Price & Consensus: BBSI
Genpact Limited: This Bermuda-based company provides business process outsourcing and IT services in North and Latin America, India, the rest 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.
For 2021, the company has raised its guidance. Adjusted EPS is currently anticipated in the range of $2.36-$2.39 per share compared with the previous guidance of $2.27-2.30 per share. The Zacks Consensus Estimate of $2.39 lies in line with the higher end of the updated guidance. Revenues are anticipated between $3.96 and $4 billion compared with the prior guidance of $3.93 to $3.99 billion. The Zacks Consensus Estimate of $3.99 billion lies within the updated guidance.
The Zacks Consensus Estimate for current-year EPS has improved 3.9% in the past 90 days. The stock has gained 23% over the past year.
Price & Consensus: G