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Near-Term Outlook for Computer Services Industry Looks Bright

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The Zacks Computer - Services industry   primarily comprises companies that offer cloud and software-based solutions. Their offerings include national security solutions, business support solutions (BSS), systems engineering and 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, and media and entertainment.

Here are the three major themes in the industry:

  • The advancements in areas like Internet of Things ("IoT"), artificial intelligence ("AI"), machine learning ("ML") and robotics process automation ("RPA") are changing trends in communications industry. Notably, these changing trends are creating increased demand for cost-efficient business support solutions and other digital monetization solutions.
     
  • The increasing number of cyber attacks and related security risks is expected to keep the industry’s momentum alive. Notably, 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.
     
  • The companies in this industry should benefit from increasingly complex network systems and sensitive information environments in which governments and businesses operate. The industry participants are keeping pace with global regulatory and business practice requirements, thereby helping customers incorporate best practices while complying with governmental and industry norms.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Computer - Services industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #34, which places it in the top 14% 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 solid 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.

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimates for the current year have increased 2.7%.

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 the Zacks S&P 500 composite as well as its own in the past year.

The industry has lost 15.3% over this period compared with the S&P 500’s decline of 12.2% and the broader sector’s decline of 13.4%.

One-Year Price Performance

Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings ratio, which is a commonly used multiple for valuing computer services stocks, the industry is currently trading at 15.74X versus the S&P 500’s 14.16X and the sector’s 16.14X.

Over the past five years, the industry has traded as high as 27.60X, as low as 14.73X and at the median of 22.62X, as the charts below show.

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

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

Bottom Line

Growing adoption of cyber security solutions, stringent regulatory requirements and the need for business automation solutions should continue to drive the industry’s growth.

Here, we present four stocks that either have a Zacks Rank #1 (Strong Buy) or Rank 2 (Buy). These stocks are well positioned to outperform the market. You can see the complete list of today’s Zacks #1 Rank stocks here.

Headquartered in CO, CSG Systems International, Inc. (CSGS - Free Report) , a provider of business support solutions primarily to the communications industry, has seen a 30.8% decline in its share price over the past year. For this Zacks Rank #1 stock, the Zacks Consensus Estimate for current fiscal year earnings has increased 1.8% to $2.90 over the past 60 days.

Price and Consensus: CSGS

Based in Arlington, VA, CACI International Inc (CACI - Free Report) , a provider of IT applications and infrastructure to improve communications and secure the integrity of information systems, holds a Zacks Rank #2 stock. The stock has gained 4.3% in the past year. The Zacks Consensus Estimate for its current fiscal year earnings has increased 7.1% to $10.15 over the past 60 days.

Price and Consensus: CACI

Located near Boston in Woburn, MA, LogMeIn (LOGM - Free Report) , a provider of on-demand, remote-connectivity and support solutions to small businesses, has seen a 33.1% decline in its share price over the past year. For this Zacks Rank #2 stock, the Zacks Consensus Estimate for current fiscal year earnings has remained stable at $5.34 over the past 60 days.

Price and Consensus: LOGM

VA-based ManTech International Corp. (MANT - Free Report) is a provider of technologies and solutions for mission-critical national security programs. This Zacks Rank #2 stock has lost 3.5% in the past year. The Zacks Consensus Estimate for its current fiscal year earnings has increased 1.4% to $2.09 over the past 60 days.

Price and Consensus: MANT

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