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Near-Term Outlook for Computer Services Industry 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 (BSS), 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 three major themes in the industry:

  • The advancements in areas like IoT, AI, machine learning and robotics process automation are trendsetters in every end markets namely, communications, banking, financial services, insurance, among others. Notably, these changing trends are creating increased demand for cost-efficient business support solutions and other digital monetization solutions.
  • The increasing number of cyber attacks and related security risks is expected to keep the industry’s momentum alive. Notably, government agencies are ideal targets for cyber-attacks, as they are entrusted with sensitive information. Therefore 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 players.
  • 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 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 #14, which places it in the top 5% 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.

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 but Outperforms S&P 500

The Zacks Computer - Services industry has outperformed the Zacks S&P 500 composite but underperformed the broader sector in the past year.

The industry has gained 27.6% over this period compared with the S&P 500’s rise of 23.8% and the broader sector’s return of 33%.

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 tradingat 20.67X versus the S&P 500’s 18.94X and the sector’s 22.94X.

Over the past five years, the industry has traded as high as 26.64X, as low as 15.51X and at the median of 22.44X, 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 stocks here.

VA-based ManTech International Corporation ((MANT - Free Report) ) is a provider of technologies and solutions for mission-critical national security programs. This Zacks Rank #1 stock has gained 51% in the past year. The Zacks Consensus Estimate for its current fiscal year earnings has remained stable at $2.42 over the past 30 days.

Price and Consensus: MANT

Headquarterd in Missouri,Perficient, Inc. ((PRFT - Free Report) ) is a digital transformation consulting firm. It sports a Zacks Rank #1. The stock has gained 96.4% in the past year. The Zacks Consensus Estimate for its current fiscal year earnings has remained stable at $2.06 over the past 30 days.

Price and Consensus: PRFT

Based in Arlington, CACI International Inc ((CACI - Free Report) ), a provider of IT applications and infrastructure to improve communications and secure the integrity of information systems, holds a Zacks Rank #2 stock. The stock has gained 72.6% in the past year. The Zacks Consensus Estimate for its current fiscal year earnings has decreased 0.16% to $12.21 over the past 30 days.

Price and Consensus: CACI

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