The outsourcing industry stands to benefit from the increased adoption of cloud computing and other emerging technologies. These factors drive competitive advantage, increase innovation, improve speed-to-market and boost performance within the industry. Further, the wider application of artificial intelligence should lower complications and simplify operations. Industry players are in the process of modernizing their traditional legacy-oriented business processes to keep themselves flexible in any kind of operating environment.
The rising demand for expertise in improving efficiency and reducing costs has been aiding the industry over the past several years. The industry has witnessed growth in revenues, income and cash flow over the past few years, enabling most players to pursue acquisitions and other investments as well as pay out stable dividends.
Automatic Data Processing, Inc.( ADP Quick Quote ADP - Free Report) , Paychex, Inc. ( PAYX Quick Quote PAYX - Free Report) and Genpact Limited ( G Quick Quote G - Free Report) are some of the stocks that are likely to gain from the above-mentioned favorable industry trends. However, escalating data security issues, thanks to excessive dependency on technology, are concerns for the industry.
Notably, the Zacks
Outsourcing industry has gained 5.1% over the past year against the 52.5% decline of the broader Zacks Business Services sector and 3.6% decline of the Zacks S&P 500 composite. Image Source: Zacks Investment Research
The buoyancy in the industry is further confirmed by its
Zacks Industry Rank #50, which places it in the top 20% of more than 250 Zacks industries. 3 Outsourcing Stocks to Buy Now
Given this encouraging backdrop, it would be a good idea to zero in on outsourcing stocks that have strong growth potential for 2022. Here we present three promising Zacks Rank #2 (Buy) outsourcing stocks, which have a solid expected earnings growth rate for the current year, witnessed upward estimate revisions in the past 90 days and have a strong trailing four-quarter average earnings surprise history. Additionally, these stocks have a solid long-term (three to five years) expected earnings growth rate. You can see
the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. Automatic Data Processing: This New Jersey-based provider of cloud-based human capital management solutions, continues to enjoy a dominant position in the human capital management market through strategic buyouts like Celergo, WorkMarket, Global Cash Card and The Marcus Buckingham Company. It has a strong business model, high recurring revenues, good margins, robust client retention and low capital expenditure. Further, it continues to innovate, improve operations and invest in its ongoing transformation efforts.
Further, ADP raised its fiscal 2022 outlook. The company now expects revenues to register 9-10% growth compared with the expected prior growth rate of 8-9%. Adjusted EPS is now expected to register 15-17% growth compared with the prior expected growth rate of 12-14%. The company now expects Employer Services revenues to grow at a rate of about 7% compared with the prior expected growth rate of about 6% and PEO Services revenues at a rate of 14-15% compared with the prior growth rate of 13% to 15%.
The Zacks Consensus Estimate for ADP’s 2022 EPS has moved up 2.2% in the past 90 days. Its expected earnings growth rate for the year is 15.8%. Additionally, it has a long-term (three to five years) expected earnings growth rate of 12%. Automatic Data Processing has a trailing four-quarter earnings surprise of 6.2%, on average.
ADP stock has gained 7.3% over the past year. It has a market capitalization of $87.22 billion.
Paychex: This New York-based provider of integrated human capital management solutions recently declared a dividend hike of 20%, thereby raising its quarterly cash dividend from 66 cents per share to 79 cents. The dividend will be paid out on May 26 to shareholders of record as of May 12, 2022.
The raised fiscal 2022 guidance is another notable tailwind. Total revenues are now expected to register 12-13% growth compared with the prior expectation of 10-11%. Adjusted earnings per share are now expected to register 22.5-23% growth compared with the prior expectation of 18-20%. The adjusted operating margin is expected to be almost 40% compared with the prior expectation of 39-40%. The adjusted EBITDA margin is now expected to be nearly 44-45% compared with the prior expectation of 44%.
Paychex looks strong on the back of solid top-line growth and a dominant position in the outsourcing market. Strength across Management Solutions and Professional Employer Organization and Insurance Solutions revenues are likely to aid the company’s top-line performance. Buyouts expand the company's customer base and generate cost and revenue synergies.
The Zacks Consensus Estimate for Paychex’s 2022 EPS has moved up 3% in the past 90 days. The company’s expected earnings growth rate for the current year is 23.4%. Additionally, it has a long-term (three to five years) expected earnings growth rate of 7.5%. Paychex has a trailing four-quarter earnings surprise of 10.8%, on average.
Paychex stock has gained 19.9% over the past year. It has a market capitalization of $43.21 billion.
Genpact: This Bermuda-based provider of business process outsourcing and information technology services has raised its 2022 guidance.Total revenues are now anticipated between $4.325 billion and $4.4 billion compared with the prior guidance of $4.3-$4.4 billion. Global Client revenue growth is now expected in the range of 9-11%, or 11%-13% on a constant currency basis, compared with the prior guidance of 8%-11%, or 9%-12% on a constant currency basis. Adjusted EPS is now anticipated between $2.60 and $2.76 compared with the prior guidance of $2.53-$2.71.
The company continues to enjoy a competitive position in the BPO services market based on domain expertise in business analytics, digital and consulting. Buyouts boost customer base and drive top-line growth. Artificial Intelligence offers ample growth opportunities. Genpact is benefitting from its strong clientele across the world. Consistency in dividend payments and share repurchases boost investor confidence and positively impact earnings per share.
The Zacks Consensus Estimate for Genpact’s 2022 EPS has moved up 0.8% in the past 90 days. The company’s expected earnings growth rate for the current year is 8.9%. Additionally, it has a long-term (three to five years) expected earnings growth rate of 12.3%. Genpact has a trailing four-quarter earnings surprise of 13.3%, on average.
Genpact has a market capitalization of $7.97 billion.