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Outlook for Computer IT Services Industry Appears Bright
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The Zacks Computer – IT Services industry comprises an array of companies that provide consultancy, customer relationship management (CRM), communications, IT management & operations, cloud-based web development platform, professional information solutions and outsourcing services.
The industry participants primarily cater to diversified end-markets which constitute manufacturing, banking, insurance, healthcare, government agencies and public sector institutions.
Here are the three major themes in the industry:
The industry’s growth is expected to accelerate in the near future on the back of ongoing workspace trend of Bring Your Own Devices (“BYOD”) and increasing mobile workers. In this era of digital transformation, small and medium enterprises remain key beneficiaries in this domain. Enterprises are actively seeking a common ground between on-premise and cloud infrastructures that will enable them to provide flexible and easily adoptable hybrid solutions. Further, the industry players are expected to benefit from rising IT-spending trends.
The role of IT services is evolving. In a bid to modernize legacy-oriented business processes, most of the industry participants are in the process of restructuring their traditional services. The goal is to assimilate the synergies of emerging technologies, including the likes of cloud, Internet of things (IoT), artificial intelligence (AI) and analytics, to name a few.
Increasing U.S. protectionism remains an overhang on the industry’s growth prospects, given the significant exposure of traditional IT services providers to H1-B visa issuance. Notably, lack of skilled workers particularly from STEM (Science, Technology, Engineering and Mathematics) fields in the United States has been a concern for industry participants for quite some time.
Zacks Industry Rank Indicates Bright Near-Term Prospects
The Zacks Computers - IT Services industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #62, which places it at the top 24% 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 bright 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. Since Oct 31, 2018, the industry’s earnings estimates for the current year have increased by almost 38%.
Before we present a few stocks that you may want to consider for your portfolio given the positive backdrop, 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 Computers - IT Services Industry has underperformed the Zacks S&P 500 composite as well as the broader Zacks Computer and Technology sector in the past year.
The industry has advanced 6.3% over this period compared with the S&P 500’s rally of 10.1% and the broader sector’s growth of 8.9%.
One Year Price Performance
Industry’s Current Valuation
Restructuring initiatives involving modernizing the traditional IT-service infrastructure and increasing spend on acquiring skilled talent is leading to higher debt levels, R&D, and sales & marketing expenses.
It makes sense to value the industry on the basis of EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio because this valuation metric takes into account the level of debt. The industry is currently trading at 25.78X, higher than the S&P 500’s 11.10X and the sector’s 10.78X.
Over the past five years, the industry has traded as high as 33.10X, as low as 20.64X and recorded a median of 27.60, as the charts below show.
Enterprise Value/EBITDA Ratio (TTM)
Enterprise Value/EBITDA Ratio (TTM)
Bottom Line
Increasing internet penetration rates in the emerging markets andrising IT-infrastructure spending particularly across Asia-Pacific, and focus on providing hybrid solutions remain primary catalysts. Moreover, expected positive development on the US-China trade war is likely to strengthen the industry’s growth prospects in the later part of 2019.
These stocks are well positioned to grow in the near term.
Blue Bell, PA-based Unisys Corporation (UIS - Free Report) specializes in securing client operationsand modernizing their enterprise applications. The company sports a Zacks Rank #1. The stock has returned 7.6% in the past year. The Zacks Consensus Estimate for current-year EPS has increased by 3.3% to $1.88 over the past 60 days.
Price and Consensus: UIS
Tysons, VA-based DXC Technology Company (DXC - Free Report) is primarily engaged in providing IT systems consulting – designing, developing, implementing, and integrating information systems. The stock carries a Zacks Rank #2. The Zacks Consensus Estimate for current-year EPS has improved by a couple of cents to $8.25 over the past 60 days.
Price and Consensus: DXC
Bowie, MD-based Inovalon Holdings, Inc. (INOV - Free Report) offers cloud-based platforms to facilitate data-driven health care via its flagship Inovalon ONE Platform among other products. The Zacks Rank #2 stock has returned 14.2% in the past year. The Zacks Consensus Estimate for current-year EPS has remained steady at 42 cents over the past 30 days.
Price and Consensus: INOV
Breakout Biotech Stocks with Triple-Digit Profit Potential
The biotech sector is projected to surge beyond $775 billion by 2024 as scientists develop treatments for thousands of diseases. They’re also finding ways to edit the human genome to literally erase our vulnerability to these diseases.
Zacks has just released Century of Biology: 7 Biotech Stocks to Buy Right Now to help investors profit from 7 stocks poised for outperformance. Our recent biotech recommendations have produced gains of +98%, +119% and +164% in as little as 1 month. The stocks in this report could perform even better.
Image: Bigstock
Outlook for Computer IT Services Industry Appears Bright
The Zacks Computer – IT Services industry comprises an array of companies that provide consultancy, customer relationship management (CRM), communications, IT management & operations, cloud-based web development platform, professional information solutions and outsourcing services.
The industry participants primarily cater to diversified end-markets which constitute manufacturing, banking, insurance, healthcare, government agencies and public sector institutions.
Here are the three major themes in the industry:
Zacks Industry Rank Indicates Bright Near-Term Prospects
The Zacks Computers - IT Services industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #62, which places it at the top 24% 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 bright 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. Since Oct 31, 2018, the industry’s earnings estimates for the current year have increased by almost 38%.
Before we present a few stocks that you may want to consider for your portfolio given the positive backdrop, 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 Computers - IT Services Industry has underperformed the Zacks S&P 500 composite as well as the broader Zacks Computer and Technology sector in the past year.
The industry has advanced 6.3% over this period compared with the S&P 500’s rally of 10.1% and the broader sector’s growth of 8.9%.
One Year Price Performance
Industry’s Current Valuation
Restructuring initiatives involving modernizing the traditional IT-service infrastructure and increasing spend on acquiring skilled talent is leading to higher debt levels, R&D, and sales & marketing expenses.
It makes sense to value the industry on the basis of EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio because this valuation metric takes into account the level of debt. The industry is currently trading at 25.78X, higher than the S&P 500’s 11.10X and the sector’s 10.78X.
Over the past five years, the industry has traded as high as 33.10X, as low as 20.64X and recorded a median of 27.60, as the charts below show.
Enterprise Value/EBITDA Ratio (TTM)
Enterprise Value/EBITDA Ratio (TTM)
Bottom Line
Increasing internet penetration rates in the emerging markets andrising IT-infrastructure spending particularly across Asia-Pacific, and focus on providing hybrid solutions remain primary catalysts. Moreover, expected positive development on the US-China trade war is likely to strengthen the industry’s growth prospects in the later part of 2019.
Here, we present three stocks that either have a Zacks Rank #1 (Strong Buy) or Rank 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
These stocks are well positioned to grow in the near term.
Blue Bell, PA-based Unisys Corporation (UIS - Free Report) specializes in securing client operationsand modernizing their enterprise applications. The company sports a Zacks Rank #1. The stock has returned 7.6% in the past year. The Zacks Consensus Estimate for current-year EPS has increased by 3.3% to $1.88 over the past 60 days.
Price and Consensus: UIS
Tysons, VA-based DXC Technology Company (DXC - Free Report) is primarily engaged in providing IT systems consulting – designing, developing, implementing, and integrating information systems. The stock carries a Zacks Rank #2. The Zacks Consensus Estimate for current-year EPS has improved by a couple of cents to $8.25 over the past 60 days.
Price and Consensus: DXC
Bowie, MD-based Inovalon Holdings, Inc. (INOV - Free Report) offers cloud-based platforms to facilitate data-driven health care via its flagship Inovalon ONE Platform among other products. The Zacks Rank #2 stock has returned 14.2% in the past year. The Zacks Consensus Estimate for current-year EPS has remained steady at 42 cents over the past 30 days.
Price and Consensus: INOV
Breakout Biotech Stocks with Triple-Digit Profit Potential
The biotech sector is projected to surge beyond $775 billion by 2024 as scientists develop treatments for thousands of diseases. They’re also finding ways to edit the human genome to literally erase our vulnerability to these diseases.
Zacks has just released Century of Biology: 7 Biotech Stocks to Buy Right Now to help investors profit from 7 stocks poised for outperformance. Our recent biotech recommendations have produced gains of +98%, +119% and +164% in as little as 1 month. The stocks in this report could perform even better.
See these 7 breakthrough stocks now>>