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Bright Near-Term Outlook for Consulting Services Industry

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Companies in the consulting services industry offer professional advice in management, IT, human resources, environmental regulations, logistics and marketing, real estate, among others.

The industry has grown steadily over the past several years. The largest markets for consulting services are the United States and Europe. However, global players are increasingly trying to expand into other industrialized regions and growing economies.

Here are the industry’s three major themes:
 

  • The industry is firmly tied to manufacturing and non-manufacturing activities that are currently benefiting from strength in the U.S. economy. The Purchasing Managers' Index (PMI) measured by Institute of Supply Management (ISM) touched 57.7% in October, indicating better economic activity in the manufacturing sector. This marks the 26th month of consecutive manufacturing growth. Also, October was the 105th month of consecutive growthin non-manufacturing activities with ISM-measured Non-Manufacturing Index (NMI) touching 61.6%.
     
  •  Post the 2017 tax reform, corporate spending has increased with U.S. companies pouring tax savings into growth initiatives. This is spurring demand for consulting services.
     
  • The industry is labor intensive and heavily dependent on foreign talent. Higher talent costs due to a competitive talent market coupled with Trump’s stringent policies on immigration are weighing on the industry’s performance.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Consulting Services industry is part of the broader Zacks Business Services sector.

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

It carries a Zacks Industry Rank #72, which places it in the top 28% of more than 250 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.

The trend in collective earnings estimate revisions of the constituent companies indicates a solid earnings outlook for the industry, which, in turn, has helped it gain a position within the top 50%.

The sell-side analysts covering the companies in this industry have been steadily increasing their estimates. Over the past year, the industry’s consensus earnings estimate for the current year has increased around 5.2%.

We will present a few stocks that are well positioned to outperform the market based on a strong earnings outlook, but it’s worth taking a look at the at the industry’s shareholder returns and current valuation first.

Industry Outperforming Sector and S&P 500

The Zacks Consulting Services Industry has outpaced the broader Zacks Business Services Sector as well as the Zacks S&P 500 composite over the past year.

The industry has rallied 13.2% over this period compared with the S&P 500 composite and broader sector’s rise of 5.7% and 9.2%, respectively.

One-Year Price Performance

 

Industry’s Current Valuation

Comparing the industry with the Zacks S&P 500 composite on the basis of trailing 12-month price-to-earnings (P/E) ratio, which is a commonly used multiple for the industry, we see that the industry trades at 24.40X, higher than the S&P 500’s 17.74X. It is, however, slightly below the sector’s 25.86X.

The ratio is below the five-year high of 26.26 but above the median level of 22.25 and low level of 18.69.

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

 

Bottom Line

The consulting services industry is poised to be in good shape in the near to mid-term. A strong economy leading to robust manufacturing and non-manufacturing activities, and higher corporate spending post the tax reform are likely to offset operating challenges encountered by the industry.

Below, we have mentioned four stocks from the industry, which investors should add to their portfolio, as they carry a Zacks Rank #1 (Strong Buy) or a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank  stocks here.

FTI Consulting, Inc. (FCN - Free Report) : The stock of this WA-based business advisory services provider gained a massive 64.8% over the past year. The Zacks Consensus Estimate for current-year EPS has been revised 14.7% upward in the past 60 days. The stock carries a Zacks Rank #1.

Chart: Price and Consensus: FCN

Exponent, Inc. (EXPO - Free Report) : The stock of this CA-based science and engineering consulting company gained 45.4% over the past year. The Zacks Consensus Estimate for current-year EPS has been revised 2.3% upward in the past 60 days. The stock carries a Zacks Rank #2.

Chart: Price and Consensus: EXPO

Huron Consulting Group Inc. (HURN - Free Report) : The stock of this IL-based a professional services firm has gained 35.2% in the past year. The Zacks Consensus Estimate for current-year EPS has been revised 1% downward in the past 60 days. The stock carries a Zacks Rank #2.

Chart: Price and Consensus: HURN

Navigant Consulting, Inc. (NCI - Free Report) : The stock of this IL-based professional services provider has surged 31.2% in the past year. The Zacks Consensus Estimate for current-year EPS has been revised 2.3% downward in the past 60 days. The stock carries a Zacks Rank #2.

Chart: Price and Consensus: NCI

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