Back to top

Image: Bigstock

Here's 3 Outsourcing Stocks to Consider Amid Industry Woes

Read MoreHide Full Article

The Zacks Outsourcing industry has experienced significant growth, driven by various economic, technological and business factors. Key drivers include the pursuit of cost savings, access to a pool of skilled talent and the opportunity to focus on core competencies.

Automatic Data Processing, Inc. (ADP - Free Report) , The Brink's Company (BCO - Free Report) and Barrett Business Services, Inc. (BBSI - Free Report) can be considered by investors from the in-focus Outsourcing market.

About the Industry

Outsourcing involves delegating a company's internal operations to external resources or third-party contractors to enhance operational efficiency. Within the Zacks Outsourcing sector, one can find companies that provide human capital, business management and IT solutions, primarily catering to small and medium-sized enterprises. These services encompass a broad spectrum, including HR support, payroll management, benefits administration, retirement planning and insurance services. Certain firms excel in delivering business process services, with a strong focus on transaction processing, analytics and global automation solutions. This outsourcing approach empowers businesses to concentrate on their core competencies while external experts manage these critical functions.

What's Shaping the Future of the Outsourcing Industry?

Rising Demand Environment: The industry has gained traction over the past year, thanks to the recent advancements in the field of technology and the onset of remote work. Revenues, income, and cash flows have been growing in the past year, aiding many industry players to increase dividends.

Continued Growth in Business Process & IT Outsourcing: The demand for business process outsourcing services remains high due to their advantages, including greater flexibility, cost reduction and improved service quality. The IT outsourcing market is also in good shape. In the future, outsourced IT services will cover a wide range of functions, including programming and technical support. Organizations can outsource entire IT departments to cut costs and focus on core tasks. A significant driver of outsourcing trends will be the shortage of in-house engineering talent.

Rising Importance of Cybersecurity: Heightened public awareness and evolving cyber threats, such as ransomware and national-level cyberattacks, have led to a growing demand for robust data encryption and cybersecurity measures. Companies prioritize employee security awareness training and breach detection systems to prevent cybersecurity incidents. To address these challenges, businesses increasingly turn to outsourced cybersecurity services to mitigate risks, maintain compliance and support scalability in their operations.

Emerging Technology Trends: Trends like the Internet of Things (IoT), cloud computing, Artificial Intelligence (AI), and Machine Learning (ML) are on the verge of reshaping the outsourcing sector. These innovations propel efficiency, foster innovation and bolster competitiveness, altering the delivery of outsourcing services and opening novel avenues for businesses to enhance their operational efficiency. For instance, IoT data can be collected, processed and analyzed in the cloud, enabling real-time decision-making and predictive maintenance for clients. By integrating AI and ML into customer support outsourcing, companies can provide faster, more efficient and consistent customer support while optimizing operational costs.

Zacks Industry Rank Indicates Dull Near-Term Prospects

The Zacks Outsourcing industry, which is housed within the broader Zacks Business Services sector, currently carries a Zacks Industry Rank #185. This rank places it in the bottom 26% of 250 Zacks industries.

The group’s Zacks Industry Rank, which is 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 Zacks-ranked industries outperforms the bottom 50% by a factor of more than two to one.

Before we present a few stocks that you may want to consider for your portfolio, let us take a look at the industry’s recent stock market performance and current valuation.

Industry's Price Performance

The Zacks Outsourcing industry has lagged the broader Zacks Business Services sector and the Zacks S&P 500 composite over the past year.

The industry has gained 8.1% over this period compared with 13.1% growth of the broader sector and the 18.6% 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), commonly used for valuing outsourcing stocks, the industry is currently trading at 24.07X compared with the S&P 500’s 20.76X and the sector’s 23.61X.

In the past five years, the industry has traded as high as 30.82X and as low as 18.27X, with the median being 24.18X, as the charts below show.

Price to Forward 12 Months P/E Ratio

 

3 Outsourcing Stocks to Consider

Barrett Business Services: This business management solutions provider for small and mid-sized companies in the United States is riding on growth of worksite employees as the company has sold and retained more business, and benefited from its clients’ net hiring. Also, BBSI is benefiting from rising subscribers due to a strategic multi-year partnership with Kaiser Permanente. Kaiser is renowned for its excellence in healthcare services and offers one of the most complete and competitive HMO products in the market. Furthermore, BBSI is gaining from more products to sell, more people selling it and a higher number of referral partners who are recommending it.

BBSI currently has a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for earnings is pegged at $2 per share for 2024, suggesting a 7.6% year-over-year rise. BBSIshares have gained 52.1% in the past year.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price & Consensus: BBSI

 

Brink's: This secure transportation, cash management and other security-related service provider in North America, Latin America, Europe and worldwide is benefiting from organic growth in all segments and customer offerings.

ATM Managed Services and Digital Retail Solutions are gaining from strong demands in key markets. The rise in revenues in Cash and Valuables Management is due to strong pricing discipline, and stabilization in the Commodities Movement and Storage business. The company’s business system streamlined the way it works and shifted the revenue base to higher-margin services, resulting in margin expansion.

BCO currently carries a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for earnings is pegged at $7.6 per share, increasing 2.9% year over year in 2024. BCOshares have gained more than 36.8% in the past year.

Price & Consensus: BCO

 

Automatic Data Processing: This cloud-based human capital management solutions provider’s top line is growing due to improved segmental performances.

The company is also benefiting from the launch of ADP Assist — its cross-platform solution powered by Gen AI that transforms client information into actionable insights. ADP Assist combines deep data sets and expertise to empower HR professionals, leaders and employees. Furthermore, ADP has increased its active and live next-gen payroll client count.

ADP presently carries a Zacks Rank #3. The Zacks Consensus Estimate for earnings is pegged at $10 per share for 2024, implying a 9% year-over-year rise. ADP shares have gained 5.1% in the past year.

Price & Consensus: ADP



See More Zacks Research for These Tickers


Normally $25 each - click below to receive one report FREE:


Automatic Data Processing, Inc. (ADP) - free report >>

Barrett Business Services, Inc. (BBSI) - free report >>

Brink's Company (The) (BCO) - free report >>

Published in