The Zacks Outsourcing industry has observed significant growth, driven by multiple economic, technological and business factors. The need to lower costs, the onset of remote work, the rising focus on cyber security awareness and the surge in trends such as AI and ML are key drivers.
Investors can consider Paychex, Inc. PAYX, Genpact G, and Barrett Business Services, Inc. BBSI 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 witnessed significant growth in the past year, led by recent tech advancements and a surge in remote work. Revenues, income and cash flows have risen in the past year, aiding many industry players to increase dividends.
Consistent Growth in Business Process & IT Outsourcing: Greater flexibility, lower costs and improved service quality lead to higher demand for business process outsourcing services. 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. Companies can outsource entire IT departments to lower costs and focus on core tasks. A significant driver of outsourcing trends will be the shortage of in-house engineering talent.
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. To mitigate cybersecurity threats, companies are focusing on employee security awareness training and breach detection systems. Businesses are increasingly turning 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 gradually reshaping the outsourcing sector. These innovations improve efficiency, pave the path for future innovations and increase competitiveness, changing the outsourcing landscape for businesses to streamline operations. 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 swifter, effective 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 #151. This rank places it in the bottom 40% 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 outperform 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 Outperforms Sector But Lags S&P 500
Over the past year, the Zacks Outsourcing industry beat the broader Zacks Business Services sector while lagging the Zacks S&P 500 composite.
The industry has rallied 25.7% over this period compared with the broader sector's 23.4% growth and the 26.4% 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 25.75X compared with the S&P 500’s 22.34X and the sector’s 24.59.
In the past five years, the industry has traded as high as 30.82X and as low as 18.27X, with the median being 24.26X, as the charts below show.
Price to Forward 12 Months P/E Ratio
3 Outsourcing Stocks Worth a Look
Paychex: This integrated human capital management (HCM) solutions provider is riding on the back of robust sales, growing clients and rising retention.
PAYX’s management solution’s revenues are growing on the back of higher product penetration and rising clients served across the suite of HCM solutions and client employees for HR solutions. The PEO business is performing well due to a robust value proposition, as evidenced by solid growth in worksite employees, because of strong sales, high retention and insurance enrollment.
The company is boosting customer engagement by providing them with robust data and vital insights using Gen-AI. PAYX is offering its clients Paychex Flex Perks to provide employees with benefits tailored to the needs of today’s dynamic, five-generational workforce.
The Zacks Consensus Estimate for the company’s fiscal 2025 EPS has been revised marginally upward over the past 90 days. Earnings are expected to increase 5.7% year over year in fiscal 2025. Shares of Paychex have gained 22.7% over the past year.
PAYX carries a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Genpact: This business process outsourcing and information technology provider is growing on the back of new deal ramps, advanced tech services, data, analytics and AI.
The company is witnessing significant opportunities to boost revenues as it is increasing partner relationship strength. Genpact’s AI-led solution, Finance Data Hub, powered by the Databricks data intelligence platform, is providing CFOs and their teams with swift access to accurate data to enhance decision-making and operational efficiency.
Gen-AI is expanding Genpact’s total addressable market and it is observing a rise in Gen-AI bookings. The company is empowering its clients to accelerate their Gen-AI journeys and achieve transformative results using its advanced technology expertise, industry knowledge and operational excellence.
G carries a Zacks Rank #2 at present. The Zacks Consensus Estimate for the company’s 2024 EPS has been revised 2.5% upward over the past 90 days. Earnings are expected to increase 8.4% year over year in 2024. Shares of Genpact have gained 26.7% over the past year.
Barrett Business Services: This business management solutions provider is benefiting from increasing the top of the sales funnel and hiking the number of worksite employees from client additions.
The company entered a strategic multi-year partnership with Kaiser Permanente and is selling its health maintenance organization plan with its national preferred provider organization plan. This new business is leading to notable growth in subscriber count.
BBSI has a Zacks Rank #3 (Hold) at present. The Zacks Consensus Estimate for the company’s 2024 EPS has been revised marginally upward over the past 90 days. Earnings are anticipated to increase 8.1% year over year in 2024. Shares of Barrett Business Services have gained 53% over the past year.
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