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Near-Term Outlook Bleak for Consulting Services Industry

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The Zacks Consulting Services industry comprises companies that offer a range of services including economic, financial, business, information technology and management consulting.

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:
 

  • This multi-billion-dollar industry is enjoying a steady rate of revenue, profit and cash flow growth. This is enabling most industry players to steadily increase dividends.
     
  • Thriving manufacturing and non-manufacturing activities on the back of favorable policies and higher corporate spending post the tax reform resulted in better business for consulting companies.
     
  • Consulting firms continue to have issues when it comes to attracting and retaining skilled consultants. 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 Gloomy Prospects

The Zacks Consulting Services Industry, which is housed within the broader Zacks Business Services  sector, currently carries a Zacks Industry Rank #170. This rank places it in the bottom 34% 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 bleak near-term growth 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.

Despite the bleak prospects, we present a few stocks that have the potential to outperform the market. But before that, it’s worth taking a look at the industry’s performance and current valuation.

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 19.6% over this period compared with the S&P 500 composite and broader sector’s rise of 8.7% and 17.5%, respectively.

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), which is a commonly used multiple for the industry, we see that the industry trades at 25.72X, higher than the S&P 500’s 17.88X. It is, however, below the sector’s 27.86X.

Over the past five years, the industry has traded as high as 26.26X, as low as 18.69X and at the median of 22.40X, as the charts below show.

Bottom Line

A highly competitive talent market continues to be an overhang for the industry that has thrived well on the back of healthy manufacturing and non-manufacturing activities.

Below, we have mentioned three 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.

CRA International, Inc. (CRAI - Free Report) : The stock of this MA-based provider of economic, financial, and management consulting services has gained 18.6% over the past year. The Zacks Consensus Estimate for current-year EPS has been revised 4.7% upward in the past 60 days. The stock carries a Zacks Rank #1.

Accenture plc (ACN - Free Report) : The stock of this Dublin, Ireland-based consulting, technology, and outsourcing services provider has gained 25% over the past year. The Zacks Consensus Estimate for current-year EPS has been revised 1% upward in the past 60 days. The stock carries a Zacks Rank #2.

CBIZ, Inc. (CBZ - Free Report) :The stock of this OH-based professional business services provider has gained 18.7% in the past year. The Zacks Consensus Estimate for current-year EPS has been revised 2.6% upward in the past 60 days. The stock carries a Zacks Rank #2.

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