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Disappointing Near-Term Outlook for Outsourcing Industry
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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.
Prominent players from the industry include Automatic Data Processing (ADP - Free Report) and Broadridge Financial Solutions (BR - Free Report) .
Here are the industry’s three major themes:
Increasing demand for expertise in improving efficiency and reducing costs has been benefitting the industry. Revenues and cash flows of most of the industry participants remain stable through the economic cycle, enabling them to pay out stable dividends.
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. Higher talent costs due to a competitive market coupled with Trump’s stringent policies on immigration are weighing on the industry’s performance.
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 #180. This rank places it in the bottom 29% 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 4.6%.
Before we present a few stocks that investors can buy or retain given their growth prospects, let’s take a look at the industry’s recent stock market performance and current valuation.
Industry Lags Sector, Outperforms S&P 500
Over the past year, the performance of the Zacks Outsourcing Services industry compared favorably with the Zacks S&P 500 composite but unfavorably with the broader sector.
The industry has rallied 29.3% over this period compared with 34% rise of the broader sector and 28% 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 22.8X compared with the S&P 500’s 18.75X and the sector’s 24.72X.
Over the past five years, the industry has traded as high as 23.76X, as low as 18.79X and at the median of 22.31X, 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 continue to be major impediments to growth of outsourcing firms in the United States, growing adoption of emerging technologies and increasing transparency in global outsourcing policies are expected to keep the industry in good shape in the long run.
One stock in the Zacks Outsourcing Services universe currently carries a Zacks Rank #2 (Buy).
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. The Zacks Consensus Estimate for current-year EPS has improved 9.6% in the past 60 days.
The Brink's Company (BCO - Free Report) : This Virginia-based company provides secure transportation, cash management, and other security-related services in North America, South America, and internationally. The Zacks Consensus Estimate for current-year EPS has improved 1% in the past 60 days.
Price and Consensus: BCO
Paychex, Inc. (PAYX - Free Report) : This New York-based company provides integrated human capital management solutions for payroll, benefits, human resource (HR), retirement, and insurance services for small- to medium-sized businesses in the United States and Europe. The Zacks Consensus Estimate for current-year EPS has improved 0.6% in the past 60 days.
Price and Consensus: PAYX
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Image: Bigstock
Disappointing Near-Term Outlook for Outsourcing Industry
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.
Prominent players from the industry include Automatic Data Processing (ADP - Free Report) and Broadridge Financial Solutions (BR - Free Report) .
Here are the industry’s three major themes:
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 #180. This rank places it in the bottom 29% 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 4.6%.
Before we present a few stocks that investors can buy or retain given their growth prospects, let’s take a look at the industry’s recent stock market performance and current valuation.
Industry Lags Sector, Outperforms S&P 500
Over the past year, the performance of the Zacks Outsourcing Services industry compared favorably with the Zacks S&P 500 composite but unfavorably with the broader sector.
The industry has rallied 29.3% over this period compared with 34% rise of the broader sector and 28% 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 22.8X compared with the S&P 500’s 18.75X and the sector’s 24.72X.
Over the past five years, the industry has traded as high as 23.76X, as low as 18.79X and at the median of 22.31X, 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 continue to be major impediments to growth of outsourcing firms in the United States, growing adoption of emerging technologies and increasing transparency in global outsourcing policies are expected to keep the industry in good shape in the long run.
One stock in the Zacks Outsourcing Services universe currently carries a Zacks Rank #2 (Buy).
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. The Zacks Consensus Estimate for current-year EPS has improved 9.6% in the past 60 days.
Price and Consensus: BBSI
We are also presenting two more stocks from the same industry, which we believe investors should retain as they carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Brink's Company (BCO - Free Report) : This Virginia-based company provides secure transportation, cash management, and other security-related services in North America, South America, and internationally. The Zacks Consensus Estimate for current-year EPS has improved 1% in the past 60 days.
Price and Consensus: BCO
Paychex, Inc. (PAYX - Free Report) : This New York-based company provides integrated human capital management solutions for payroll, benefits, human resource (HR), retirement, and insurance services for small- to medium-sized businesses in the United States and Europe. The Zacks Consensus Estimate for current-year EPS has improved 0.6% in the past 60 days.
Price and Consensus: PAYX
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>>