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Computer Services Industry's Near-Term Outlook 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, 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 industry’s three major themes:

  • Advancements in areas like IoT, AI, ML and robotics process automation are setting trends in the communications industry. Notably, these developments are pushing up demand for cost-efficient business support solutions and other digital monetization solutions.
  • Government agencies are ideal targets of cyber attacks, as they are entrusted with sensitive information. The increasing number of cyber attacks and related security risks are expected to keep the industry’s momentum alive. Notably, 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 participants.
  • 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 the 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 #46, which places it in the top 18% 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. Since Feb 28, 2019, the industry’s earnings estimates for the current year has increased 0.7%.

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 declined 2.7% over this period compared with the S&P 500’s rise of 5.1% and the broader sector’s return of 3.6%.

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 19.39X versus the S&P 500’s 16.91X and the sector’s 19.59X.

Over the past five years, the industry has traded as high as 27.60X, as low as 15.35X 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 three 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 (Strong Buy) stocks here.

Perficient, Inc. (PRFT - Free Report) , a digital transformation consulting firm, holds a Zacks Rank #1. The stock has gained 24% in the past year. The Zacks Consensus Estimate for its current fiscal year earnings has increased 10.7% to $1.87 over the past 60 days.

Price and Consensus: PRFT

Headquartered in CO, CSGS Systems International, Inc. (CSGS - Free Report) is a provider of business support solutions primarily to the communications industry. It has seen a 17.7% increase in its share price over the past year. For this Zacks Rank #2 stock, the Zacks Consensus Estimate for current fiscal year earnings has increased 0.31% to $3.27 over the past 60 days.

Price and Consensus: CSGS

VA-based ManTech International Corporation (MANT - Free Report) is a provider of technologies and solutions for mission-critical national security programs. This Zacks Rank #2 stock has gained 16.6% in the past year. The Zacks Consensus Estimate for its current fiscal year earnings has increased 1.8% to $2.28 over the past 60 days.

Price and Consensus: MANT

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