Operational efficiencies and cost savings in the wake of the coronavirus crisis-induced work-from-home wave and increased adoption of cloud computing and other emerging technologies bode well for Zacks’ outsourcing industry. These drive competitive advantage and increase innovation and speed to market.
automatic data processing, inc. (ADP – free report), paychex, inc. (payx – free report) and Genpact Limited (GRAM – Free Report) are some stocks that are likely to benefit from the industry trends mentioned above. However, growing data security issues, thanks to increased reliance on technology, are concerns for the industry.
Outsourcing is the practice of transferring control of certain operations, services, or processes, previously performed by internal company personnel and resources, to external resources or external contractors to improve operational efficiency by focusing on core business competencies. The Zacks outsourcing industry comprises companies dedicated to providing human capital management solutions, business management solutions, and information technology solutions for human resources, payroll, benefits and retirement, and insurance services to small and medium-sized businesses. Some industry participants also provide business process services with capabilities in intensive transaction processing, analysis, and automation in the United States and abroad.
What is shaping the future of the outsourcing industry?
A healthy demand environment: The growing demand to improve efficiency and reduce costs has benefited the industry in recent years. The industry has witnessed growth in revenue, revenue, and cash flow in recent years, which has allowed most players to pursue acquisitions and other investments and pay steady dividends.
Growing dependence on technologies: Most industry participants are also looking at emerging technologies such as cloud computing to build competitive advantage, increase innovation, improve speed to market and drive performance within the industry. The wider application of artificial intelligence (AI) is expected to be the biggest change induced by the pandemic. The adoption of AI should reduce complications and simplify operations. This should help the industry.
In particular, industry players are in the process of modernizing their traditional legacy-oriented business processes to remain flexible in any type of operating environment.
Security issues and solutions: Increasing reliance on technology has led to increasing cases of hacking, identity theft, and malicious payload delivery. As work-from-home models are the new normal professional scenario, remote infrastructure vulnerabilities and security gaps are being exploited to secure unauthorized access to proprietary systems and data.
As a preventive measure to improve data security and ensure cyber resiliency, increased implementation of secure access technologies such as VPN, two-factor authentication, and other identification controls and access management for home workers, as well as increased monitoring tools and threat detection. , are being used. Outsourced service providers are also updating organizational policies (including Bring Your Own Device and Work from Home policies) and data breach protocols to reduce security risks. A number of companies are also prioritizing proper employee training on emerging threats and data security issues.
Zacks Industry Rating Indicates Encouraging Outlook
The Zacks Outsourcing Industry, which is within the broader Zacks Business Services sector, currently has a Zacks #40 Industry Rank. This rank places it in the top 16% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all member stocks, indicates continued short-term outperformance. Our research shows that the top 50% of Zacks ranked industries outperform the bottom 50% by a factor of more than two to one.
Buy-side analysts covering companies in this industry have been increasing their estimates. Over the past year, the industry consensus earnings estimate for the current year is up 4.7%.
Before presenting some stocks that investors may buy given their growth prospects, let’s take a look at the industry’s recent stock market performance and current valuation.
Industry outperforms sector and S&P 500
The Zacks Outsourcing Industry has outperformed the broader Zacks Business Services sector as well as the Zacks S&P 500 Composite over the past year.
The industry has gained 3.3% during this period against a 43% drop for the sector as a whole and a 14.9% drop for the Zacks S&P 500 Composite.
One year price performance
Current Industry Valuation
On a 12-month P/E basis, which is commonly used to value outsourcing stocks, the industry is currently trading at 23.19X compared to the S&P 500 of 16.2X and 21, 31X of the sector.
Over the past five years, the industry has traded as high as 28.89X, as low as 17.89X, and at the median of 23.58X, as the charts below show.
12-month forward P/E ratio
3 Stock Outsourcing to Watch Closely
We feature three Zacks Rank #2 (Buy) stocks that are well positioned for short-term growth.
Automatic data processing: This New Jersey-based company offers cloud-based human capital management solutions around the world. ADP’s three-tier business strategy helps it maintain and grow its strong position as a provider of human capital management (HCM) technology and services. The company is focused on offering a complete suite of cloud-based HCM and HR outsourcing solutions. Strategic acquisitions such as Celergo, WorkMarket, Global Cash Card and The Marcus Buckingham Company have strengthened ADP’s customer base and are helping it expand its operations in international markets. It has a strong business model, high recurring revenue, good margins, strong customer retention, and low capex. Additionally, it continues to innovate, improve operations and invest in its ongoing transformation efforts.
The Zacks Consensus Estimate for ADP’s 2022 EPS is up 3.2% over the last 90 days. ADP shares are up 13.2% over the past year.
Price and Consensus: ADP
paychex: This New York-based company offers integrated human capital management solutions.
Paychex continues to benefit from growth in its payroll customer bases and product penetration in HCM offerings, as a result of strong sales performance and high retention levels, high demand for HR solutions, improved revenue per customer as a result of higher levels of employment within the company’s customer base and improved price realization and expansion of HCM’s ancillary services. An increase in the number of average employees in the workplace, the impact of an increase in average wages per employee in the workplace, higher state unemployment insurance revenue, and an increase in health insurance revenue from PEO act as other favorable factors. Additionally, cost-saving initiatives result in sequential improvement in margins. The acquisitions have broadened Paychex’s customer base in addition to generating cost and revenue synergies. Consistency in rewarding shareholders through dividend payments and share buybacks increases investor confidence and has a positive impact on earnings per share.
The Zacks Consensus Estimate for Paychex’s 2022 EPS has improved 1.7% over the last 90 days. PAYX shares have declined 5.8% over the past year.
Genpact Limited: This Bermuda-based company provides business process outsourcing and IT services in North and Latin America, India, the rest of Asia, and Europe. Genpact enjoys a competitive position in the BPO services market based on its domain expertise in business analytics, digital and consulting. Acquisitions have helped it expand its product portfolio and gain new domain expertise. AI offers ample opportunities for growth amid COVID-induced reliance on technology.
The Zacks Consensus Estimate for Genpact’s 2022 EPS has improved 0.4% over the last 90 days. G shares have declined 5.3% over the past year.
Price and consensus: G