Driven by economic, technological and business factors, the Zacks Outsourcing industry has grown significantly over time. Key factors include cost savings, access to skilled talent, and the ability to focus on core competencies. According to ReportLinker's report, the outsourcing sector is anticipated to witness a substantial growth of USD 75.89 trillion from 2023 to 2027, with a steady compound annual growth rate (CAGR) of 6.5%.
Automatic Data Processing, Inc.ADP, Paychex, Inc. PAYX, Broadridge Financial Solutions, Inc. BR and Genpact Limited G 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, you'll 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.
4 Trends Shaping the Future of Outsourcing Industry
Continued growth of Business Process Outsourcing (BPO): Most outsourcing activities occur at lower levels within the organizational hierarchy. Per Grand View Research report, in 2022, the global market for BPO reached a valuation of USD 261.9 billion and is expected to grow at a compound annual growth rate (CAGR) of 9.4% from 2023 to 2030. The demand for these services remains high due to their advantages, including greater flexibility, cost reduction, and improved service quality.
Continued relevance of IT Outsourcing: The IT Outsourcing market is forecasted to attain a revenue of approximately $460.10 billion in 2023, with an anticipated annual growth rate (CAGR 2023-2028) of 11.07%. This growth is expected to lead to a market size of about $777.70 billion by 2028. In the future, outsourced IT services will still 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 trends of technology: 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, fundamentally 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 Encouraging Prospects
The Zacks Outsourcing industry, which is housed within the broader Zacks Business Services sector, currently carries a Zacks Industry Rank #90. This rank places it in the top 36% 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 continued outperformance in the near term. Our research shows that the top 50% of Zacks-ranked industries outperform the bottom 50% by a factor of more than two to one.
The buy-side analysts covering the companies in this industry have been increasing their estimates. Over the past year, the industry’s consensus earnings estimate for the current year has increased 16.6%.
Before we discuss several stocks that investors may consider holding due to their growth potential, let's first examine the recent performance of the industry in the stock market and its current valuation.
Industry's Price Performance
The Zacks Outsourcing industry has outperformed the broader Zacks Business Services sector but lagged the Zacks S&P 500 composite over the past year.
The industry has gained 5.5% over this period compared with a 4.5% gain of the broader sector and 15.1% increase 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 21.17X compared with the S&P 500’s 19.45X and the sector’s 23.37X.
Over the past five years, the industry has traded as high as 30.79X, as low as 18.34X and at the median of 24.57X, as the charts below show.
Price to Forward 12-Month P/E Ratio
4 Outsourcing Stocks to Consider
Here are four stocks from the outsourcing space with a bright near-term prospect.
Automatic Data Processing is a top-tier provider of cloud-based Human Capital Management (HCM) technology solutions, offering global employers comprehensive services such as payroll, talent management, HR, benefits administration, and time and attendance management. By strategically acquiring firms like Celergo, WorkMarket, Global Cash Card, and The Marcus Buckingham Company, the company sustains its dominant position in the human capital management market, underpinned by a robust business model, significant recurring revenues, attractive profit margins, outstanding client retention, and minimal capital outlays.
For Fiscal 2024, ADP expects revenues to register 6-7% growth. Adjusted earnings per share is expected to register 10-12% growth. The adjusted effective tax rate is estimated to be approximately 23%. Adjusted EBIT margin is expected to grow 60-80 bps. Automatic Data Processing expects Employer Services revenues to grow at a rate of about 7-8%, while PEO Services revenues are expected to grow at 3-5%.
Zacks Consensus Estimate for fiscal 2024 revenues is pegged at $19.14 billion, 6.3% higher than the year-ago reported figure. The consensus mark for earnings is pegged at $9.14, indicating a growth of 11.1% from the year-ago reported figure. The estimate has been revised northwards 1.9% in the past 60 days. ADP currently sports Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Price & Consensus: ADP
Paychex stands as a prominent provider of integrated HCM solutions, offering payroll, human resource, retirement, and insurance services tailored to the needs of small- to medium-sized businesses. Paychex exhibits strength driven by robust revenue growth and its commanding position in the outsourcing market. The company is actively pursuing opportunities in the professional employer organization industry. At the same time, its steadfast commitment to consistent dividend payouts and share buybacks enhances investor confidence and contributes positively to earnings per share.
For Fiscal 2024, Paychex provided its fiscal 2024 outlook wherein adjusted earnings per share (EPS) is expected to register 9-10% growth. PAYX expects total revenues to register 6-7% growth. Management Solutions’ revenues are expected to grow around 5-6%. PEO and Insurance Solutions’ revenues are expected to grow 6-9%. Interest on funds held for clients is anticipated to be in the range of $135-$145 million. The company expects operating margin in the range of 41-42%.
Zacks Consensus Estimate for fiscal 2024 revenues is pegged at $5.34 billion, 6.6% higher than the year ago reported figure. Consensus mark for earnings is pegged at $4.68 indicating a growth of 9.6% from the year-ago reported figure. The estimate has been slightly revised northwards in the past 60 days. PAYX currently holds Zacks Rank #3 (Hold).
Price & Consensus: PAYX
Broadridge Financials is a global fintech firm known for providing tech-driven solutions and investor communication services to banks, broker-dealers, asset managers, and issuers, with a reputation for producing and distributing critical financial documents. Its strong business model, driven by growing recurring fee revenues and strategic acquisitions, positions it well for revenue growth, supported by a diverse product portfolio. Broadridge excels in implementing its growth strategy in governance, capital markets, and wealth management, seizing opportunities in the tech solutions space, including digital, AI, cloud, and blockchain, through acquisitions.
For fiscal 2024, Broadridge expects recurring revenue growth to be 6-9%. Adjusted earnings per share growth is expected to be 8-12%. Adjusted operating income margin is estimated to be around 20%. Closed sales are anticipated between $280 million and $320 million.
Zacks Consensus Estimate for fiscal 2024 revenues is pegged at $6.5 billion, 7.2% higher than the year-ago reported figure. The consensus mark for earnings is pegged at $7.63, indicating a growth of 8.8% from the year ago reported figure. The estimate has been revised northwards by 3.53% in the past 60 days. BR currently sports Zacks Rank #2.
Price & Consensus: BR
Genpact manages business processes for international companies, utilizing a blend of process mastery, IT proficiency, analytical skills, and industry-specific experience. Their global delivery platform offers a wide array of services. Genpact's solid presence in the BPO services market is reinforced by its business analytics, digital solutions and consulting expertise. Acquisitions are broadening their customer base and boosting revenue, while the burgeoning realm of Artificial Intelligence holds substantial growth prospects. Genpact strategically leverages its extensive global clientele for maximum advantage.
For 2023, Revenues are anticipated to be between $4.64 billion and $4.71 billion. Adjusted EPS is projected in the range of $2.92-$2.99. Adjusted income from operations margin is expected to be 16.8%.
Zacks Consensus Estimate for fiscal 2024 revenues is pegged at $4.6 billion, 5.3% higher than the year-ago reported figure. The consensus mark for earnings is pegged at $2.92, indicating a growth of 6.6% from the year-ago reported figure. The estimate has been revised slightly downwards in the past 60 days. G currently holds Zacks Rank #3.
Price & Consensus: G
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