2 stocks to buy in the thriving IT services sector

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Zacks’ IT services business is benefiting from the growing adoption of the work-from-home trend, helping to meet the growing demand for cloud-enabled software solutions. The growing adoption of digital transformation techniques in healthcare and financial services remains the silver lining for industry players. CGI Group GIB and efficient PRFTs are well placed to benefit from the advantages mentioned above. Growing adoption of cybersecurity solutions, stringent regulatory requirements, digital healthcare, and the need for business automation solutions are expected to continue driving the industry. However, the industry has faced the brunt of pandemic-induced disruption. The recovery is still significantly weak compared to the pre-pandemic level.

Description of the industry

Zacks’ IT services segment primarily includes companies that offer cloud and software solutions. Their offerings include national security solutions, business support solutions and systems engineering as well as software application development solutions. Industry participants serve a variety of end markets and customers, including intelligence, defense, U.S. government agencies, communications, banking, financial services, insurance, healthcare, as well as media and entertainment. Consulting companies in the sector help their clients in their ongoing digital transformation. They provide end-to-end services, including application development, integration and maintenance; management of technological infrastructures; and business process services.

3 IT services industry trends to watch

Remote work and e-learning trends boost prospects: Industry growth is expected to accelerate in the coming days due to the increase in the number of remote workers following the coronavirus-induced wave of work from home. In this era of digital transformation, enterprises are actively seeking a middle ground between on-premises and cloud infrastructures that will enable them to deliver flexible and easily adoptable hybrid solutions. Coronavirus-induced remote working has led to increased demand for cloud-based and cost-effective business support solutions, as well as other digital monetization solutions, which bodes well for the industry.

The growth of cyberattacks is a tailwind: The growing number of cyberattacks and associated security risks are expected to maintain the momentum of the industry. Government agencies are ideal targets for cyberattacks because they are loaded with sensitive information. Therefore, the growing need for cybersecurity solutions and services in critical areas such as defense, intelligence, and US government civilian agencies bodes well for industry players.

Regulatory compliance drives demand: Companies in this industry stand to benefit from the increasingly complex network systems and sensitive information environments in which governments as well as businesses operate. Industry participants keep pace with global regulatory requirements and business practices, helping customers incorporate best practices while complying with government and industry standards.

Zacks’ Industry Ranking Indicates Strong Prospects

The Zacks Computer – Services industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Ranking of #74, which places it in the top 30% of over 250 Zacks industries.

The group’s Zacks Industry Rank, which is essentially the average of the Zacks Rank of all member stocks, indicates a bullish near-term outlook. Our research shows that the top 50% of industries ranked by Zacks outperform the bottom 50% by a factor of more than two to one.

The industry’s position in the top 50% of industries ranked by Zacks is the result of a positive earnings outlook for the constituent companies overall. Looking at revisions to overall earnings estimates, it appears analysts are optimistic about the earnings growth potential of this group. Since Nov. 31, 2021, the Zacks consensus estimate for industry earnings in 2022 has increased by 4%.

Before we outline a few stocks you might want to consider for your portfolio, let’s take a look at recent stock market performance and the industry valuation picture.

The industry beats the sector and the S&P 500

The Zacks Computer – Services industry has outperformed the broader Zacks Computer And Technology sector as well as the S&P 500 Index over the past year.

The industry fell 4.2% during this period, compared to the 11% decline in the S&P 500 and the 25.1% decline in the broader sector.

Year-over-year price performance

Current industry assessment

Based on the 12-month forward P/E, which is a multiple commonly used to value IT stocks, we see that the sector is currently trading at 12.13X versus the S&P 500’s 16.73X and P/E 12-month forecast for the sector. E of 20.12X.

Over the past five years, the industry has traded as low as 20.67X, as low as 11.85X and at the median of 16.65X, as seen in the chart below.

Forward 12-Month Price-to-Earnings (P/E) Ratio

2 IT services stocks to buy now

CGI Group: This Canadian provider of information technology and business consulting services benefits from an expanding customer base and an accretive acquisition.

This Zacks Tier 2 (Buy) company offers a full range of services, including business consulting, strategic information technology and systems integration, IT and business process management and property management services. intellectual property to help customers accelerate digitization. You can see the full list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Zacks’ consensus estimate for CGI’s fiscal 2022 earnings has been flat at $4.76 per share over the past 30 days. The stock has lost 9.3% since the start of the year.

Pricing and Consensus: GIB

efficient – This Zacks #2-ranked company is backed by a growing customer base. Strong demand for Perficient’s global delivery model (40% of delivery resources are offshore) was a key driver. Significantly, in the first quarter of 2022, the company recorded 124 deals worth more than $500,000, compared to 92 deals in the year-ago quarter.

The consensus rating for Perficient’s earnings in 2022 has held steady at $4.31 per share over the past 30 days. The stock has lost 27.6% since the start of the year.

Pricing and Consensus: PRFT

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