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3 Stocks to Watch From a Growing Outsourcing Industry
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The Zacks Outsourcing industry has experienced significant growth, driven by various economic, technological and business factors. Key drivers include the pursuit of cost savings, access to a pool of skilled talent and the opportunity to focus on core competencies. According to a report by ReportLinker, the outsourcing sector is projected to see substantial expansion, with an estimated growth of $75.89 trillion between 2023 and 2027. This growth is expected to maintain a steady compound annual growth rate (CAGR) of 6.5%, reflecting the industry's resilience and attractiveness to businesses seeking efficient solutions.
Automatic Data Processing, Inc.(ADP - Free Report) , Paychex, Inc. (PAYX - Free Report) and Broadridge Financial Solutions, Inc. (BR - Free Report) can be considered by investors from the in-focus Outsourcing market.
About the Industry
Outsourcing involves delegating a company's internal operations to external resources or third-party contractors to enhance operational efficiency. Within the Zacks Outsourcing sector, you'll find companies that provide human capital, business management and IT solutions, primarily catering to small- and medium-sized enterprises. These services encompass a broad spectrum, including HR support, payroll management, benefits administration, retirement planning and insurance services. Certain firms excel in delivering business process services, with a strong focus on transaction processing, analytics and global automation solutions. This outsourcing approach empowers businesses to concentrate on their core competencies while external experts manage these critical functions.
5 Trends Shaping the Future of Outsourcing Industry
Rising Demand Environment: The industry has gained traction over the past year, thanks to the recent advancements in the field of technology and the onset of remote work. Revenues, income and cash flows have been growing in the past year, aiding many industry players to pay out stable dividends.
Continued Growth of Business Process Outsourcing (BPO): Most outsourcing activities occur at lower levels within the organizational hierarchy. Per Grand View Research, the global market for BPO reached a valuation of $261.9 billion in 2022 and is expected to witness a compound annual growth rate (CAGR) of 9.4% from 2023 to 2030. The demand for these services remains high due to their advantages, including greater flexibility, cost reduction and improved service quality.
Relevance of IT Outsourcing: The IT Outsourcing market is projected to generate revenues of approximately $460.10 billion in 2023, with an anticipated CAGR of 11.07% from 2023 to 2028. The upside is expected to lead to a market size of about $777.70 billion by 2028. In the future, outsourced IT services will cover a wide range of functions, including programming and technical support. Organizations can outsource entire IT departments to cut costs and focus on core tasks. A significant driver of outsourcing trends will be the shortage of in-house engineering talent.
Rising Importance of Cybersecurity: Heightened public awareness and evolving cyber threats, like ransomware and national-level cyberattacks, have led to a growing demand for robust data encryption and cybersecurity measures. Companies prioritize employee security awareness training and breach detection systems to prevent cybersecurity incidents. To address these challenges, businesses increasingly turn to outsourced cybersecurity services to mitigate risks, maintain compliance and support scalability in their operations.
Emerging Technology Trends: Trends like the Internet of Things (IoT), cloud computing, Artificial Intelligence (AI) and Machine Learning (ML) are on the verge of reshaping the outsourcing sector. These innovations propel efficiency, foster innovation and bolster competitiveness, altering the delivery of outsourcing services and opening novel avenues for businesses to enhance their operational efficiency. For instance, IoT data can be collected, processed and analyzed in the cloud, enabling real-time decision-making and predictive maintenance for clients. By integrating AI and ML into customer support outsourcing, companies can provide faster, more efficient and consistent customer support while optimizing operational costs.
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 #93. This rank places it in the top 37% 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 Zacks-ranked industries outperform the bottom 50% by a factor of more than two to one.
The 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 1.9%.
Before we discuss several stocks that investors may consider holding due to their growth potential, let's first examine the recent performance of the industry in the stock market and its current valuation.
Industry's Price Performance
The Zacks Outsourcing industry has lagged the broader Zacks Business Services sector and the Zacks S&P 500 composite over the past year.
The industry has gained 13.5% over this period compared with 22.4% gain of the broader sector and a 23% increase of the Zacks S&P 500 composite.
One-Year Price Performance
Industry's Current Valuation
On the basis of forward 12-month price-to-earnings (P/E), commonly used for valuing outsourcing stocks, the industry is currently trading at 20.41X compared with the S&P 500’s 20.72X and the sector’s 26.21X.
In the past five years, the industry has traded as high as 30.82X, as low as 18.23X and at the median of 24.4X, as the charts below show.
Price to Forward 12-Month P/E Ratio
3 Outsourcing Stocks to Consider
Here are three stocks from the outsourcing space with bright near-term prospects. Paychex currently has a Zacks Rank #2 (Buy), while BR and ADP have a Zacks Rank #3 (Hold) each.
Paychex is a prominent provider of integrated HCM solutions, offering payroll, human resource, retirement and insurance services tailored to the needs of small- to medium-sized businesses. Paychex exhibits strength, driven by robust revenue growth and its commanding position in the outsourcing market. The company is actively pursuing opportunities in the professional employer organization industry. At the same time, its steadfast commitment to consistent dividend payouts and share buybacks enhances investor confidence and contributes to earnings per share.
Paychex provided its fiscal 2024 outlook wherein adjusted earnings per share are expected to register 10-11% growth, up from 9-11% expected previously. PAYX reaffirmed its expectation of total revenues to register 6-7% growth.
Management Solutions’ revenues are expected to grow around 5-6%. PEO and Insurance Solutions revenues are expected to grow 7-9%, up from the previously guided 6-9%. Interest on funds held for clients is anticipated to be in the range of $140-$150 million. The company expects operating margin in the range of 41-42%.
The Zacks Consensus Estimate for fiscal 2024 revenues is pegged at $5.33 billion, indicating a 6.5% increase from the year-ago reported figure. The consensus mark for earnings is pegged at $4.72, indicating growth of 10.5% from the year-ago reported figure. The estimate has been slightly revised northward in the past 60 days. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price & Consensus: PAYX
Broadridge Financial is a global fintech firm known for providing tech-driven solutions and investor communication services to banks, broker-dealers, asset managers and issuers, with a reputation for producing and distributing critical financial documents. Its robust business model, driven by growing recurring fee revenues and strategic acquisitions, positions it well for revenue growth, supported by a diverse product portfolio. Broadridge excels in implementing its growth strategy in governance, capital markets and wealth management, seizing opportunities in the tech solutions space, including digital, AI, cloud and blockchain, through acquisitions.
For fiscal 2024, Broadridge expects recurring revenue growth in the range of 6-9%. Adjusted earnings per share growth is expected to be in the 8-12% range. Adjusted operating income margin is estimated to be around 20%. Closed sales are anticipated between $280 million and $320 million.
The Zacks Consensus Estimate for fiscal 2024 revenues is pegged at $6.54 billion, suggesting an increase of 7.9% from the year-ago reported figure. The consensus mark for earnings is pegged at $7.72, indicating growth of 10.1% from the year-ago figure. The estimate has remained unchanged in the past 60 days.
Price & Consensus: BR
Automatic Data Processing is a top-tier provider of cloud-based Human Capital Management (HCM) technology solutions, offering global employers comprehensive services such as payroll, talent management, HR, benefits administration, and time and attendance management. By strategically acquiring firms like Celergo, WorkMarket, Global Cash Card and The Marcus Buckingham Company, the company sustains its dominant position in the HCM market, underpinned by a robust business model, significant recurring revenues, attractive profit margins, outstanding client retention and minimal capital outlays.
For fiscal 2024, ADP still expects revenues to register 6-7% growth. Adjusted EPS is expected to register 10-12% growth. The adjusted effective tax rate is estimated to be approximately 23%. Adjusted EBIT margin is expected to grow 60-70 bps, down from the previously guided 60-80 bps.
Automatic Data Processing expects Employer Services revenues to grow at a rate of about 7-8%, while PEO Services revenues are expected to grow 3-4%.
The Zacks Consensus Estimate for fiscal 2024 revenues is pegged at $19.15 billion, calling for a 6.3% rise from the year-ago reported figure. The consensus mark for earnings per share is pegged at $9.14, indicating growth of 11.1% from the year-ago reported figure. The estimate has remained unchanged in the past 60 days.
Price & Consensus: ADP
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3 Stocks to Watch From a Growing Outsourcing Industry
The Zacks Outsourcing industry has experienced significant growth, driven by various economic, technological and business factors. Key drivers include the pursuit of cost savings, access to a pool of skilled talent and the opportunity to focus on core competencies. According to a report by ReportLinker, the outsourcing sector is projected to see substantial expansion, with an estimated growth of $75.89 trillion between 2023 and 2027. This growth is expected to maintain a steady compound annual growth rate (CAGR) of 6.5%, reflecting the industry's resilience and attractiveness to businesses seeking efficient solutions.
Automatic Data Processing, Inc.(ADP - Free Report) , Paychex, Inc. (PAYX - Free Report) and Broadridge Financial Solutions, Inc. (BR - Free Report) can be considered by investors from the in-focus Outsourcing market.
About the Industry
Outsourcing involves delegating a company's internal operations to external resources or third-party contractors to enhance operational efficiency. Within the Zacks Outsourcing sector, you'll find companies that provide human capital, business management and IT solutions, primarily catering to small- and medium-sized enterprises. These services encompass a broad spectrum, including HR support, payroll management, benefits administration, retirement planning and insurance services. Certain firms excel in delivering business process services, with a strong focus on transaction processing, analytics and global automation solutions. This outsourcing approach empowers businesses to concentrate on their core competencies while external experts manage these critical functions.
5 Trends Shaping the Future of Outsourcing Industry
Rising Demand Environment: The industry has gained traction over the past year, thanks to the recent advancements in the field of technology and the onset of remote work. Revenues, income and cash flows have been growing in the past year, aiding many industry players to pay out stable dividends.
Continued Growth of Business Process Outsourcing (BPO): Most outsourcing activities occur at lower levels within the organizational hierarchy. Per Grand View Research, the global market for BPO reached a valuation of $261.9 billion in 2022 and is expected to witness a compound annual growth rate (CAGR) of 9.4% from 2023 to 2030. The demand for these services remains high due to their advantages, including greater flexibility, cost reduction and improved service quality.
Relevance of IT Outsourcing: The IT Outsourcing market is projected to generate revenues of approximately $460.10 billion in 2023, with an anticipated CAGR of 11.07% from 2023 to 2028. The upside is expected to lead to a market size of about $777.70 billion by 2028. In the future, outsourced IT services will cover a wide range of functions, including programming and technical support. Organizations can outsource entire IT departments to cut costs and focus on core tasks. A significant driver of outsourcing trends will be the shortage of in-house engineering talent.
Rising Importance of Cybersecurity: Heightened public awareness and evolving cyber threats, like ransomware and national-level cyberattacks, have led to a growing demand for robust data encryption and cybersecurity measures. Companies prioritize employee security awareness training and breach detection systems to prevent cybersecurity incidents. To address these challenges, businesses increasingly turn to outsourced cybersecurity services to mitigate risks, maintain compliance and support scalability in their operations.
Emerging Technology Trends: Trends like the Internet of Things (IoT), cloud computing, Artificial Intelligence (AI) and Machine Learning (ML) are on the verge of reshaping the outsourcing sector. These innovations propel efficiency, foster innovation and bolster competitiveness, altering the delivery of outsourcing services and opening novel avenues for businesses to enhance their operational efficiency. For instance, IoT data can be collected, processed and analyzed in the cloud, enabling real-time decision-making and predictive maintenance for clients. By integrating AI and ML into customer support outsourcing, companies can provide faster, more efficient and consistent customer support while optimizing operational costs.
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 #93. This rank places it in the top 37% 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 Zacks-ranked industries outperform the bottom 50% by a factor of more than two to one.
The 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 1.9%.
Before we discuss several stocks that investors may consider holding due to their growth potential, let's first examine the recent performance of the industry in the stock market and its current valuation.
Industry's Price Performance
The Zacks Outsourcing industry has lagged the broader Zacks Business Services sector and the Zacks S&P 500 composite over the past year.
The industry has gained 13.5% over this period compared with 22.4% gain of the broader sector and a 23% increase of the Zacks S&P 500 composite.
One-Year Price Performance
Industry's Current Valuation
On the basis of forward 12-month price-to-earnings (P/E), commonly used for valuing outsourcing stocks, the industry is currently trading at 20.41X compared with the S&P 500’s 20.72X and the sector’s 26.21X.
In the past five years, the industry has traded as high as 30.82X, as low as 18.23X and at the median of 24.4X, as the charts below show.
Price to Forward 12-Month P/E Ratio
3 Outsourcing Stocks to Consider
Here are three stocks from the outsourcing space with bright near-term prospects. Paychex currently has a Zacks Rank #2 (Buy), while BR and ADP have a Zacks Rank #3 (Hold) each.
Paychex is a prominent provider of integrated HCM solutions, offering payroll, human resource, retirement and insurance services tailored to the needs of small- to medium-sized businesses. Paychex exhibits strength, driven by robust revenue growth and its commanding position in the outsourcing market. The company is actively pursuing opportunities in the professional employer organization industry. At the same time, its steadfast commitment to consistent dividend payouts and share buybacks enhances investor confidence and contributes to earnings per share.
Paychex provided its fiscal 2024 outlook wherein adjusted earnings per share are expected to register 10-11% growth, up from 9-11% expected previously. PAYX reaffirmed its expectation of total revenues to register 6-7% growth.
Management Solutions’ revenues are expected to grow around 5-6%. PEO and Insurance Solutions revenues are expected to grow 7-9%, up from the previously guided 6-9%. Interest on funds held for clients is anticipated to be in the range of $140-$150 million. The company expects operating margin in the range of 41-42%.
The Zacks Consensus Estimate for fiscal 2024 revenues is pegged at $5.33 billion, indicating a 6.5% increase from the year-ago reported figure. The consensus mark for earnings is pegged at $4.72, indicating growth of 10.5% from the year-ago reported figure. The estimate has been slightly revised northward in the past 60 days. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price & Consensus: PAYX
Broadridge Financial is a global fintech firm known for providing tech-driven solutions and investor communication services to banks, broker-dealers, asset managers and issuers, with a reputation for producing and distributing critical financial documents. Its robust business model, driven by growing recurring fee revenues and strategic acquisitions, positions it well for revenue growth, supported by a diverse product portfolio. Broadridge excels in implementing its growth strategy in governance, capital markets and wealth management, seizing opportunities in the tech solutions space, including digital, AI, cloud and blockchain, through acquisitions.
For fiscal 2024, Broadridge expects recurring revenue growth in the range of 6-9%. Adjusted earnings per share growth is expected to be in the 8-12% range. Adjusted operating income margin is estimated to be around 20%. Closed sales are anticipated between $280 million and $320 million.
The Zacks Consensus Estimate for fiscal 2024 revenues is pegged at $6.54 billion, suggesting an increase of 7.9% from the year-ago reported figure. The consensus mark for earnings is pegged at $7.72, indicating growth of 10.1% from the year-ago figure. The estimate has remained unchanged in the past 60 days.
Price & Consensus: BR
Automatic Data Processing is a top-tier provider of cloud-based Human Capital Management (HCM) technology solutions, offering global employers comprehensive services such as payroll, talent management, HR, benefits administration, and time and attendance management. By strategically acquiring firms like Celergo, WorkMarket, Global Cash Card and The Marcus Buckingham Company, the company sustains its dominant position in the HCM market, underpinned by a robust business model, significant recurring revenues, attractive profit margins, outstanding client retention and minimal capital outlays.
For fiscal 2024, ADP still expects revenues to register 6-7% growth. Adjusted EPS is expected to register 10-12% growth. The adjusted effective tax rate is estimated to be approximately 23%. Adjusted EBIT margin is expected to grow 60-70 bps, down from the previously guided 60-80 bps.
Automatic Data Processing expects Employer Services revenues to grow at a rate of about 7-8%, while PEO Services revenues are expected to grow 3-4%.
The Zacks Consensus Estimate for fiscal 2024 revenues is pegged at $19.15 billion, calling for a 6.3% rise from the year-ago reported figure. The consensus mark for earnings per share is pegged at $9.14, indicating growth of 11.1% from the year-ago reported figure. The estimate has remained unchanged in the past 60 days.
Price & Consensus: ADP