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Outsourcing Industry's Near-Term Prospects Disappointing

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Outsourcing is the practice of transferring control of certain operations, services or processes, previously done by a company’s internal staff or resources, to a third party.

The Zacks Outsourcing industry comprises companies that are engaged in providing information technology, payroll, human resource, retirement and insurance services, business management solutions and business process outsourcing for small and mid-sized companies in the United States and abroad.

Here are the industry’s three major themes:

  • Increasing demand for expertise in improving efficiency and reducing costs is currently keeping the industry in good shape. Revenues and cash flows of most of the industry participants remain stable through the economic cycle.
  • Most of the industry participants are considering emerging technologies such as cloud computing and robotic process automation (RPA) to drive competitive advantage. This should help increase innovation, improve speed-to-market and drive performance within the industry. The industry should witness increased transparency on a global scale as several companies are expected to adopt transparent policies.
  • The industry is labor intensive and heavily dependent on foreign talent. Rising talent costs due to competition coupled with Trump’s stringent policies on immigration could curb the industry’s growth.

Zacks Industry Rank Indicates Gloomy Prospects

The Zacks Outsourcing industry, which is housed within the broader Zacks Business Services sector, currently carries a Zacks Industry Rank #164. This rank places it in the bottom 36% 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 underperformance in the near term. 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 sell-side analysts covering the companies in this industry have been decreasing their estimates. Over the past year, the industry’s consensus earnings estimate for the current year has decreased 0.9%.

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 current valuation.

Industry Outperforms Sector and S&P 500 Index

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

The industry has rallied 22.7% over this period, significantly outperforming the 15.1% rise of the broader sector and 7% rise 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), which is commonly used for valuing outsourcing stocks, the industry is currently trading at 22.82X compared with the S&P 500’s 17.21X and the sector’s 23.13X.

Over the past five years, the industry has traded as high as 23.69X, as low as 18.50X and at the median of 21.77X, as the charts below show.

Forward 12-month Price-to-Earnings (P/E)

 

 

Bottom Line

While rising talent costs due to competition and increasing U.S. protectionism act as major impediments to growth of outsourcing firms in the United States, growing adoption of emerging technologies and increase in transparency in global outsourcing policies are expected to keep the same in good shape.

Two stocks in the Zacks Outsourcing Services universe currently hold a Zacks Rank #2 (Buy). Below, we have also mentioned one more stock from the same industry, which we believe investors should retain as it carries a Zacks Rank #3 (Hold). All the three stocks have witnessed upward earnings estimate revisions in the past 90 days.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Let’s take a look at the stocks.

Automatic Data Processing, Inc. (ADP - Free Report) : This New-Jersey based companyprovides business process outsourcing services worldwide.Currently, it has a Zacks Rank #2. The Zacks Consensus Estimate for current-year EPS has improved 2.1% in the past 90 days.

Price and Consensus: ADP

 

Barrett Business Services, Inc. (BBSI - Free Report) : This Washington-based company provides business management solutions for small and mid-sized companies in the United States. Currently, it has a Zacks Rank #2. The Zacks Consensus Estimate for current-year EPS has improved 0.6% in the past 90 days.

Price and Consensus: BBSI

 

TriNet Group, Inc. (TNET - Free Report) : This California-based company provides human resources solutions for small and mid-size businesses in the United States and Canada. Currently, it carries a Zacks Rank #3. The Zacks Consensus Estimate for current-year EPS has improved 9% in the past 90 days.

Price and Consensus: TNET

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