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Dull Near-Term Outlook for Computer-Integrated Systems Industry

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The Zacks Computer – Integrated Systems industry comprises companies that provide advanced information technology solutions, including computer systems, software, storage systems and microelectronics.

Some of the industry participants also provide technological solutions (both products and services) to aid organizations connect, interact and transact with customers. There are others that develop and market information recognition and data entry software, systems and technologies.

The industry has benefited immensely from the rise of advanced forms of data management, rapid shift from traditional silos, increased demand to integrate deployment techniques and modern application developments.

Some of the prominent industry players include Hewlett Packard Enterprise (HPE - Free Report) and International Business Machines (IBM - Free Report) .

Here are the four major industry themes:

  • The industry’s near-term prospects look gloomy attributed to global business disruptions caused by coronavirus-led lockdown. Due to uncertainty over global economic and business activities, industry participants are likely to witness supply constraints, softness in server demand and cognitive applications, and delays in customer acceptance resulting in high levels of backlog, particularly in Compute, High Performance Computing (HPC) & Mass Storage Class (MCS) and Storage. Moreover, the industry players are anticipated to bear the brunt of slowdown in IT spending, as predicted by IDC. Also, volatility in foreign exchange — primarily due to the current macro-economic scenario and headwinds in the emerging markets — does not bode well for the industry.
     
  • Moreover, industry participants are facing challenges owing to the ongoing and heavily time-consuming business model transition to cloud. Further, lower spending across Data-Center Systems primarily due to component shortages like memory and CPUs and deceleration in hyperscale spending is likely to dampen prospects of the industry participants.
     
  • The industry is benefiting from rising demand for integrated solutions across small, medium and large-scale enterprises and increasing investments in IoT, big data, AI and blockchain software technologies. Moreover, business analytics, cloud computing, mobile, security and social business present significant opportunities on increasing number of remote workers in the wake of coronavirus-induced work-from-home wave.
     
  • Additionally, growing adoption of multi-cloud model to achieve better scalability and attain improved resource utilization is also expanding the scope for industry participants. Cloud and hardware/software virtual technologies are anticipated to favorably impact the industry. As growth and investment opportunities in developed countries continue to slow down, we believe that emerging economies will play a crucial role in the days ahead.


Zacks Industry Rank Indicates Gloomy Prospects

The Zacks Computer – Integrated Systems industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #149, which places it in the bottom 41% 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.

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 – Integrated Systems industry has underperformed the broader sector as well as the Zacks S&P 500 composite over the past year.

The industry has declined 4.1% over this period against the S&P 500 and the broader sector’s respective rally of 10.5% and 23.5%.

One-Year Price Performance

 
 

Industry’s Current Valuation

On the basis of trailing 12-month P/S, which is a commonly used multiple for valuing computer integrated systems stocks, we see that the industry is currently trading at 1.4X compared with the S&P 500’s 3.58X. It is also below the sector’s trailing 12-month P/S of 3.82X.

Over the past five years, the industry has traded as high as 1.87X and as low as 0.76X, with the median being at 1.52X, as the charts below shows.

Price-to-Sales TTM

 
 

Price-to-Sales TTM

 


Stocks to Watch

Robust adoption of cloud computing, big data and shift from traditional silos will continue to drive the industry. However, the coronavirus-led demand downturn is a major headwind, at least in the near term.

Here we present a Zacks Rank #1 (Strong Buy) stock from the Zacks Computer – Integrated Systems industry. You can see the complete list of today’s Zacks #1 Rank stocks here.

FARO Technologies (FARO - Free Report) , which sports a Zacks Rank #1, is well positioned to grow in the near term. Headquartered in Lake Mary, FL, this provider of computer-aided measurement and imaging devices and software has returned 24.3% in a year’s time.

Notably, the Zacks Consensus Estimate for 2020 earnings has remained steady at 62 cents per share over the past 30 days.

Price and Consensus: FARO

 



We also present a couple of stocks with a Zacks Rank #3 (Hold) that investors may currently retain.

International Business Machines - This Armonk, NY-based company has returned 0.7% in the past year. Notably, the Zacks Consensus Estimate for 2020 earnings has remained steady at $11.29 per share over the past 30 days.

Price and Consensus: IBM

 

 

USA Technologies (USAT - Free Report) – Headquartered in Malvern, PA, this provider of networked credit card and other non-cash systems to the vending, commercial laundry, hospitality and digital imaging industries has lost 9.6%.

Notably, the Zacks Consensus Estimate for 2020 loss has remained steady at 24 cents per share over the past 30 days.

Price and Consensus: USAT

 





 

 

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