The Zacks Outsourcing industry has witnessed significant growth, driven by numerous economic, technological and business factors. Key drivers include the desire to reduce costs, the onset of remote work, the rising focus on cyber security awareness, and the surge in trends such as AI and ML.
Investors can look at Broadridge Financial Solutions, Inc. BR, Genpact Limited G and ExlService Holdings, Inc. EXLS from the 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, administration of benefits, 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?
Strong Market Demand: The industry has gained traction over the past year, attributed to the recent technological advancements and the onset of remote work. Revenues, income, and cash flows have risen in the past year, benefiting many industry players to increase dividends.
Persistent Growth in Business Process & IT Outsourcing: The demand for business process outsourcing services remains high due to their advantages, including greater flexibility, lower cost, and augmented service quality. The IT outsourcing market is also in robust 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 reduce costs and focus on core tasks. A significant driver of outsourcing trends will be the shortage of in-house engineering talent.
The Urgency of Cybersecurity Measures: Increased public awareness and evolving cyber threats, such as ransomware and national-level cyberattacks, have led to a rising demand for robust data encryption and cybersecurity measures. Companies focus on employee security awareness training and breach detection systems to mitigate cybersecurity incidents. To address these issues, businesses increasingly turn to outsourced cybersecurity services to reduce risks, maintain compliance, and support scalability in their operations.
Changing Industry Trends: Trends like the Internet of Things (IoT), cloud computing, Artificial Intelligence (AI) and Machine Learning (ML) are on the cusp of reshaping the outsourcing sector. These innovations boost 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 #193. This rank places it in the bottom 23% 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 Underperforms Sector & S&P 500
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 rallied 35.3% over this period compared with 39.9% growth of the broader sector and the 42.3% 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 25.2X compared with the S&P 500’s 22.01X and the sector’s 25.22X.
In the past five years, the industry has traded as high as 25.2X and as low as 24.48X, with the median being 24.84X, as the charts below show.
Price to Forward 12 Months P/E Ratio
3 Outsourcing Stocks Worth Watching
Broadridge Financial Solutions: This investor communications and technology-driven solution provider’s growth is fueled by improved segmental performances.
The Investor Communication Solutions segment is benefiting from data-driven fund solutions, issuer and digital communications. Revenues in data-driven fund solutions are led by growth in retirement and workplace solutions, and data and analytics products. Increases in BR’s registered shareholder solutions and disclosure products are driving Issuer revenues.
Global Technology and Operations’ revenues are riding on the back of capital markets and wealth businesses. Strong revenue growth from sales and increasing trading volumes are driving capital markets’ revenues. BR is witnessing an improvement in its margins due to higher operating leverage and disciplined expense management.
BR has a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for Broadridge Financial Solutions’ fiscal 2025 bottom line has increased 1.4% in the past 90 days. BRshares have gained 12.6% in the past six months.
ExlService: This data analytics, and digital operations and solutions provider’s top-line growth is riding on the back of the data and AI-led strategy, allowing the company to boost its growth momentum across segments.
The Analytics segment’s revenue growth is fueled by robust healthcare payment services and data management. Strong performance in the insurance and emerging businesses is driving revenue growth in the Digital Operations and Solutions segment. EXLS’s clients are focusing on cost efficiency and digital transformation, creating an optimistic demand environment for the company. Furthermore, the acquisition of ITI Data is augmenting the capabilities of EXLS to manage data and expand its client base.
EXLS carries a Zacks Rank #2 at present. The Zacks Consensus Estimate for 2024 bottom line has increased marginally in the past 90 days. EXLS shares have gained 33.1% in the past six months.
Genpact: This business process outsourcing and information technology services provider is riding on the back of strong partnerships, comprehensive Data-Tech-AI Solutions and a simplified go-to-market approach.
The company is observing sufficient opportunities to augment its revenue growth as it strengthens partner relationships. Rising revenues generated by partners result from investment in a world-class leadership team, driving awareness, enhancing go-to-market activations and scaling delivery capabilities with hyperscaler partners, including Amazon Web Services and Microsoft.
Genpact’s go-to-market approach, part of Data-Tech-AI, is driving revenue growth as Gen AI is significantly expanding the company’s total addressable market and becoming an important business driver. G plays a vital role in leveraging AI to drive business transformation for its clients due to its deep domain expertise at the ground level, which is essential for implementing AI-first end-to-end business processes in production environments.
G carries a Zacks Rank #3 (Hold) at present. The Zacks Consensus Estimate for 2024 bottom line has increased 3.6% in the past 90 days. G shares have gained 25.4% in the past six months.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
