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Computers-IT Services Industry's Near-Term Prospects Encouraging

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The Zacks Computers– IT Services industry comprises companies that provide consultancy, communications, IT management & operations, cloud-based web development platform, customer relationship management (CRM), professional information solutions and outsourcing services.

The industry participants serve a wide array of end-markets, which include manufacturing, banking, insurance, healthcare, government agencies and public sector institutions.

Let us take a look at the four major themes in the industry:
 

  • Most of the industry participants are in the process of modernizing their traditional legacy-oriented business processes in order to keep pace with the evolving IT services. The aim is to integrate the synergies of emerging technologies, including the likes of cloud, IoT, AI and analytics, to name a few. Moreover, increasing Internet penetration in the emerging markets, particularly across Asia-Pacific, is a tailwind. For instance, DXC Technology (DXC - Free Report) , one of the notable IT services providers, is focusing on cyber business, cloud computing market and Big Data business, to bolster growth prospects. Moreover, CDW Corporation (CDW - Free Report) is benefiting from growth across all the end markets with strength in small business, government and healthcare verticals.
     
  • The industry’s growth is expected to accelerate in the days ahead on increasing mobile workers owing to the ongoing workspace trend of Bring Your Own Devices (BYOD). In this era of digital transformation, small and medium enterprises remain key beneficiaries in this domain. Enterprises are actively seeking a common ground between on-premise and cloud infrastructures that will enable them to provide flexible and easily adoptable hybrid solutions. Further, the industry players are expected to benefit from recovery in IT-spending in 2020. Notably, ServiceNow (NOW - Free Report) , a prominent player in the industry, is benefiting from rising adoption of its workflows from companies undergoing digital transformation.
     
  • Nevertheless, increasing spend on acquiring skilled talent, and restructuring initiatives involving modernizing the traditional IT-service infrastructure are leading to higher debt levels, R&D, and sales & marketing expenses. Moreover, imposition of tariffs owing to the U.S.-China trade war, and macro-economic headwinds in the emerging markets does not bode well.
     
  • Further, increasing U.S. protectionism continues to impede the industry’s prospects, as traditional IT services providers are significantly exposed to H1-B visa issuance. Notably, lack of skilled workers particularly from STEM (Science, Technology, Engineering and Mathematics) fields in the United States has been a concern for quite some time. Further, presence of bellwethers like Accenture plc (ACN - Free Report) and International Business Machines (IBM - Free Report) in the IT and professional services markets intensify the competition in the space.


Zacks Industry Rank Indicates Bright Near-Term Prospects

The Zacks Computers - IT Services industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #101, which places it at the top 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 bright near-term 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.

There are a few stocks that you may want to consider for your portfolio, as they are likely to benefit from robust adoption of modernized IT-service infrastructure solutions. Before we present them, 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 Computers - IT Services Industry has underperformed both the Zacks S&P 500 composite and the broader Zacks Computer and Technology sector in the past year.

The industry has gained 29.9% over this period compared with the S&P 500 and the broader sector’s rally of 31.1% and 34%, respectively.

One Year Price Performance




Industry’s Current Valuation

On the basis of EV/EBITDA (or Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio, which is a commonly used multiple for valuing the Computers - IT Services stocks, the industry is currently trading at 27.36X, higher than the S&P 500’s 11.93X and the sector’s 12X.

Over the past five years, the industry has traded as high as 32.87X and as low as 20.83X, with the median being at 27.63X, as the charts below show.

Enterprise Value/EBITDA Ratio (TTM)



Enterprise Value/EBITDA Ratio (TTM)



Bottom Line

Rising adoption of easily adoptable hybrid solutions and increasing Internet penetration rates in the emerging markets hold promise, amid escalating debt and macroeconomic headwinds.

Here, we present four stocks that either have a Zacks Rank #1 (Strong Buy) or 2 (Buy) that investors may take a look at. You can see the complete list of today’s Zacks #1 Rank stocks here.

These stocks are well positioned to grow in the near term.

Fair Isaac Corporation (FICO - Free Report) : San Jose, CA-based Fair Isaac provides analytical solutions, and data management products to financial institutions, retailers, healthcare organizations, and public agencies. The Zacks Rank #1 stock has soared 102.9% year to date. Moreover, the Zacks Consensus Estimate for fiscal 2020 earnings improved 1.7% in the past 60 days to $8.37 per share.

Price and Consensus: FICO



EPAM Systems, Inc. (EPAM - Free Report) : Headquartered at Newtown, PA, EPAM Systems is engaged in providing services pertaining to software product development, custom application development, application testing, among others. The Zacks Rank #2 stock has gained 86.1% year to date. The Zacks Consensus Estimate for 2020 earnings has inched up 1.3% to $6.47 per share over the past 60 days.

Price and Consensus: EPAM
 


CDW Corporation: Lincolnshire, IL-based CDW Corporation offers integrated IT solutions to enterprises, government agencies, healthcare, and education customers across the United States, the U.K. and Canada. The stock, which carries a Zacks Rank #2, has returned 80.5% year to date. The Zacks Consensus Estimate for 2020 earnings has improved by 2.5% to $6.52 per share over the past 60 days.

Price and Consensus: CDW



CDK Global, Inc. : Hoffman Estates, IL-based CDK Global provides integrated IT and digital marketing solutions to the automotive retail industry. The Zacks Rank #2 stock has returned 15.7% year to date. The Zacks Consensus Estimate for fiscal 2020 earnings has been stable at $3.42 per share over the past 30 days.

Price and Consensus: CDK



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