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Outsourcing Industry Outlook: Near-Term Prospects Bright
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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 players from the industry include Paychex (PAYX - Free Report) , Automatic Data Processing (ADP - Free Report) and Broadridge Financial Solutions (BR - Free Report) .
Here are the industry’s three major themes:
The industry has been benefiting from increasing demand for expertise to improve operational efficiency and reduce costs. Revenues and cash flows of most of the industry participants remain stable through the economic cycle, enabling them to pay out stable dividends.
Most of the industry participants are considering emerging technologies such as cloud computing and robotic process automation (RPA) to drive competitive advantage. This should help increase innovation, improve speed-to-market and drive performance within the industry. The industry should witness increased transparency on a global scale as several companies are expected to adopt transparent policies.
Increasing U.S. protectionism remains a hindrance to the industry’s growth prospects, given its labor-intensive nature and heavy dependence on foreign talent. Rising talent costs due to competition coupled with Trump’s stringent policies on immigration could curb the industry’s growth. Also, uncertainty over settlement of the trade dispute between the United States and China and macro-economic headwinds in the emerging markets do not bode well for the industry.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Outsourcing industry, which is housed within the broader Zacks Business Services sector, currently carries a Zacks Industry Rank #112. This rank places it in the top 44% 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 growth 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 current valuation.
Industry Lags Sector, Outperforms S&P 500
Over the past year, the performance of the Zacks Outsourcing Services industry compared favorably with the Zacks S&P 500 composite but unfavorably with the broader sector.
The industry has rallied 9% over this period compared with 9.8% rise of the broader sector and 0.9% 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), which is commonly used for valuing outsourcing stocks, the industry is currently trading at 23.26X compared with the S&P 500’s 16.82X and the sector’s 24.67X.
Over the past five years, the industry has traded as high as 23.76X, as low as 18.79X and at the median of 22.18X, as the charts below show.
Forward 12-month Price-to-Earnings (P/E)
Bottom Line
While growing adoption of emerging technologies and increase in transparency in global outsourcing policies are expected to keep outsourcing firms in the United States in good shape, rising talent costs due to competition and increasing U.S. protectionism act as a major hindrance.
Two stocks from the Zacks Outsourcing Services universe carry a Zacks Rank #2 (Buy).
TriNet Group (TNET - Free Report) : This California-based company provides human resources solutions for small and mid-size businesses in the United States and Canada. Currently, it carries a Zacks Rank #2. The Zacks Consensus Estimate for current-year EPS has improved 1.2% in the past 60 days.
Price and Consensus: TNET
Barrett Business Services (BBSI - Free Report) : This Washington-based company provides business management solutions for small and mid-sized companies in the United States. Currently, it has a Zacks Rank #2. The Zacks Consensus Estimate for current-year EPS has improved 0.5% in the past 60 days.
Automatic Data Processing: This New-Jersey based company provides business process outsourcing services worldwide. Currently, it has a Zacks Rank #3. The Zacks Consensus Estimate for current-year EPS has improved 1.9% in the past 60 days.
Price and Consensus: ADP
Broadridge Financial Solutions: This New York based company provides investor communications and technology-driven solutions for the financial services industry worldwide. Currently, it has a Zacks Rank #3. The Zacks Consensus Estimate for current-year EPS has improved 0.6% in the past 60 days.
Price and Consensus: BR
Biggest Tech Breakthrough in a Generation
Be among the early investors in the new type of device that experts say could impact society as much as the discovery of electricity. Current technology will soon be outdated and replaced by these new devices. In the process, it’s expected to create 22 million jobs and generate $12.3 trillion in activity.
A select few stocks could skyrocket the most as rollout accelerates for this new tech. Early investors could see gains similar to buying Microsoft in the 1990s. Zacks’ just-released special report reveals 7 stocks to watch. The report is only available for a limited time.
Image: Bigstock
Outsourcing Industry Outlook: Near-Term Prospects Bright
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 players from the industry include Paychex (PAYX - Free Report) , Automatic Data Processing (ADP - Free Report) and Broadridge Financial Solutions (BR - Free Report) .
Here are the industry’s three major themes:
Zacks Industry Rank Indicates Bright Prospects
The Zacks Outsourcing industry, which is housed within the broader Zacks Business Services sector, currently carries a Zacks Industry Rank #112. This rank places it in the top 44% 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 growth 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 current valuation.
Industry Lags Sector, Outperforms S&P 500
Over the past year, the performance of the Zacks Outsourcing Services industry compared favorably with the Zacks S&P 500 composite but unfavorably with the broader sector.
The industry has rallied 9% over this period compared with 9.8% rise of the broader sector and 0.9% 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), which is commonly used for valuing outsourcing stocks, the industry is currently trading at 23.26X compared with the S&P 500’s 16.82X and the sector’s 24.67X.
Over the past five years, the industry has traded as high as 23.76X, as low as 18.79X and at the median of 22.18X, as the charts below show.
Forward 12-month Price-to-Earnings (P/E)
Bottom Line
While growing adoption of emerging technologies and increase in transparency in global outsourcing policies are expected to keep outsourcing firms in the United States in good shape, rising talent costs due to competition and increasing U.S. protectionism act as a major hindrance.
Two stocks from the Zacks Outsourcing Services universe carry a Zacks Rank #2 (Buy).
TriNet Group (TNET - Free Report) : This California-based company provides human resources solutions for small and mid-size businesses in the United States and Canada. Currently, it carries a Zacks Rank #2. The Zacks Consensus Estimate for current-year EPS has improved 1.2% in the past 60 days.
Price and Consensus: TNET
Barrett Business Services (BBSI - Free Report) : This Washington-based company provides business management solutions for small and mid-sized companies in the United States. Currently, it has a Zacks Rank #2. The Zacks Consensus Estimate for current-year EPS has improved 0.5% in the past 60 days.
Price and Consensus: BBSI
We also present two more stocks from the same industry, which we believe investors should hold on to as it carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Automatic Data Processing: This New-Jersey based company provides business process outsourcing services worldwide. Currently, it has a Zacks Rank #3. The Zacks Consensus Estimate for current-year EPS has improved 1.9% in the past 60 days.
Price and Consensus: ADP
Broadridge Financial Solutions: This New York based company provides investor communications and technology-driven solutions for the financial services industry worldwide. Currently, it has a Zacks Rank #3. The Zacks Consensus Estimate for current-year EPS has improved 0.6% in the past 60 days.
Price and Consensus: BR
Biggest Tech Breakthrough in a Generation
Be among the early investors in the new type of device that experts say could impact society as much as the discovery of electricity. Current technology will soon be outdated and replaced by these new devices. In the process, it’s expected to create 22 million jobs and generate $12.3 trillion in activity.
A select few stocks could skyrocket the most as rollout accelerates for this new tech. Early investors could see gains similar to buying Microsoft in the 1990s. Zacks’ just-released special report reveals 7 stocks to watch. The report is only available for a limited time.
See 7 breakthrough stocks now>>