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Outsourcing Industry Outlook Gloomy on Coronavirus Crisis

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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.

Companies in the Zacks Outsourcing industry 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 player from the industry include Automatic Data Processing (ADP - Free Report) .

Here are the industry’s three major themes:

  • Increasing demand for expertise in improving efficiency and reducing costs has benefited the industry over the past several years. Revenues and income of most of the industry participants remained stable, enabling them to pay out stable dividends.
  • However, coronavirus has dealt a huge blow to the global outsourcing industry in recent time as lockdowns prompt firms to "reshore" jobs. Lack of labor and supply chain disruption are impacting businesses worldwide. Offices are struggling to piece together work-from-home solutions and other business-continuity plans amid operational challenges such as availability of laptops, Internet connectivity and data-security issues.
  • With majority of employees working from home, wider application of artificial intelligence (AI) is expected to be the biggest change due to the pandemic. Adoption of AI should lower complications and simplify operations. This should aid the industry.

Zacks Industry Rank Indicates Dull Prospects

The Zacks Outsourcing industry, which is housed within the broader Zacks Business Services sector, currently carries a Zacks Industry Rank #151. This rank places it in the bottom 40% 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 15.5%.

Despite the bleak prospects, we present a few stocks that investors can retain in their portfolio. But before that, let’s take a look at the industry’s recent stock market performance and current valuation

Industry Underperforms Sector and S&P 500

The Zacks Outsourcing Services industry has underperformed the broader Zacks Business Services sector as well as the Zacks S&P 500 composite over the past year.

The industry has declined 12.2% over this period compared with 0.4% decline of the broader sector. The Zacks S&P 500 composite has meanwhile risen 4%.

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 20.79X compared with the S&P 500’s 21.16X and the sector’s 27.84X.

Over the past five years, the industry has traded as high as 23.73X, as low as 17.33X and at the median of 22.22X, as the charts below show.

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

 

 

Bottom Line

With strict lockdowns in place across the globe in the wake of coronavirus outbreak, a number of firms are looking to "reshore" jobs. Meanwhile, operational challenges related to working from home such as availability of laptops, Internet connectivity and data-security issues continue. Notably, AI is expected to enhance operations going forward.

We are presenting three stocks from the industry, which we believe investors should retain as these carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Atento S.A.(ATTO - Free Report) : This Luxembourg-based company provides customer relationship management, and business process outsourcing services and solutions in Brazil, the Americas, Europe, the Middle East, and Africa. The Zacks Consensus Estimate for current-year EPS has improved more than 100% in the past 60 days.

Price and Consensus: ATTO

 

Broadridge Financial Solutions, Inc.(BR - Free Report) : This New York-based company provides investor communications and technology-driven solutions for the financial services industry worldwide. The Zacks Consensus Estimate for current-year EPS has remained unchanged in the past 60 days.

Price and Consensus: BR

 

Paychex, Inc.(PAYX - Free Report) : This New York-based company provides integrated human capital management solutions for payroll, benefits, human resource, 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 remained unchanged in the past 60 days.

Price and Consensus: PAYX

 

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