Zacks Industry Outlook CACI International, CSG Systems International and Innodata

The Zacks Computer - Services industry is suffering from broader macroeconomic challenges that have resulted in an elongated sales cycle, lower conversion rates and customer delays in making purchase decisions. However, industry participants like CACI International CACI, CSG Systems International CSGS, and Innodata INOD are riding on the ongoing digital transformation, which is increasing the demand for cloud-enabled software solutions. The rising adoption of digital transformative techniques in healthcare and financial services has been a silver lining for industry participants. The growing need for consulting, research and cyber-security solutions, stringent regulations, digital healthcare and the growing adoption of business automation solutions is likely to continue driving the industry’s prospects.

Industry Description

The Zacks Computer - Services industry primarily comprises companies that offer cloud and software-based solutions. Their offerings include consulting and research solutions, security solutions, business support solutions, systems engineering, and software application development solutions. The industry participants cater to varied end markets and customers, including intelligence, defense, U.S. government agencies, communications, banking, financial services, insurance, healthcare, and media and entertainment. Consultancy companies in the industry are helping clients in their ongoing digital transformation. They provide end-to-end services, including application development, integration and maintenance, technology infrastructure management and business process services.

3 Computer-Services Industry Trends to Watch

Remote & Hybrid Work Trends Boost Prospects: The industry’s growth is expected to accelerate in the days ahead based on an increasing number of remote and hybrid workers. In this era of digital transformation, enterprises are actively seeking a common ground between on-premise and cloud infrastructures, enabling them to provide flexible and easily adaptable hybrid solutions. The growing remote-working trend has led to increased demand for cloud and cost-efficient business support solutions, as well as other digital monetization solutions, which bode well for the industry.

Growing Cyber Attacks are Creating a Tailwind: The increasing number of cyber-attacks and related security risks are expected to keep the industry’s momentum alive. Government agencies are ideal targets for cyber-attacks, as they are entrusted with sensitive information. Therefore, the growing need for cyber security solutions and services in critical areas like defense, intelligence and civilian agencies of the U.S. government bodes well for industry players.

Regulatory Compliance Drives Demand: The companies in this industry are likely to benefit from increasingly complex network systems and sensitive information environments in which governments and businesses operate. The industry participants are keeping pace with the global regulatory and business practice requirements, thereby helping customers incorporate the best practices while complying with governmental and industry norms.

Zacks Industry Rank Indicates Bullish Prospects

The Zacks Computer – Services industry is housed within the broader Zacks Computer and Technology sector. It currently carries a Zacks Industry Rank #73, which places it in the top 29% of more than 250 Zacks industries.

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

Given the bullish industry outlook, there are a number of stocks worth buying currently. But before we present those stocks, let’s take a look at the industry’s recent stock market performance and valuation.

Industry Lags Sector and S&P 500

The Zacks Computer – Services industry has underperformed the broader Zacks Computer and Technology sector and the S&P 500 Index over the past year.

The industry has risen 27.4% over this period compared with the S&P 500’s appreciation of 36% and the broader sector’s return of 40.3%.

One-Year Price Performance

Investors interested in Computer and Technology stocks should always be looking to find the best-performing companies in the group. Is CACI International (CACI) one of those stocks right now? A quick glance at the company's year-to-date performance in comparison to the rest of the Computer and Technology sector should help us answer this question.

CACI International is one of 618 individual stocks in the Computer and Technology sector. Collectively, these companies sit at #4 in the Zacks Sector Rank. The Zacks Sector Rank considers 16 different groups, measuring the average Zacks Rank of the individual stocks within the sector to gauge the strength of each group.

The Zacks Rank is a proven model that highlights a variety of stocks with the right characteristics to outperform the market over the next one to three months. The system emphasizes earnings estimate revisions and favors companies with improving earnings outlooks. CACI International is currently sporting a Zacks Rank of #2 (Buy).

The Zacks Consensus Estimate for CACI's full-year earnings has moved 1.5% higher within the past quarter. This signals that analyst sentiment is improving and the stock's earnings outlook is more positive.

Our latest available data shows that CACI has returned about 76.8% since the start of the calendar year. In comparison, Computer and Technology companies have returned an average of 30.4%. This shows that CACI International is outperforming its peers so far this year.

One other Computer and Technology stock that has outperformed the sector so far this year is NetApp (NTAP). The stock is up 38.3% year-to-date.

In NetApp's case, the consensus EPS estimate for the current year increased 4.4% over the past three months. The stock currently has a Zacks Rank #2 (Buy).

Looking more specifically, CACI International belongs to the Computer - Services industry, a group that includes 10 individual stocks and currently sits at #73 in the Zacks Industry Rank. This group has gained an average of 21% so far this year, so CACI is performing better in this area.

In contrast, NetApp falls under the Computer- Storage Devices industry. Currently, this industry has 7 stocks and is ranked #23. Since the beginning of the year, the industry has moved +18.9%.

Investors interested in the Computer and Technology sector may want to keep a close eye on CACI International and NetApp as they attempt to continue their solid performance.

Zacks Investment Research

The proven Zacks Rank system focuses on earnings estimates and estimate revisions to find winning stocks. Nevertheless, we know that our readers all have their own perspectives, so we are always looking at the latest trends in value, growth, and momentum to find strong picks.

Considering these trends, value investing is clearly one of the most preferred ways to find strong stocks in any type of market. Value investors use a variety of methods, including tried-and-true valuation metrics, to find these stocks.

On top of the Zacks Rank, investors can also look at our innovative Style Scores system to find stocks with specific traits. For example, value investors will want to focus on the "Value" category. Stocks with high Zacks Ranks and "A" grades for Value will be some of the highest-quality value stocks on the market today.

One stock to keep an eye on is CSG Systems International (CSGS). CSGS is currently sporting a Zacks Rank of #2 (Buy), as well as a Value grade of A. The stock is trading with a P/E ratio of 12.50, which compares to its industry's average of 20.29. CSGS's Forward P/E has been as high as 14.67 and as low as 9.56, with a median of 11.14, all within the past year.

CSGS is also sporting a PEG ratio of 1.25. This popular metric is similar to the widely-known P/E ratio, with the difference being that the PEG ratio also takes into account the company's expected earnings growth rate. CSGS's industry has an average PEG of 1.90 right now. CSGS's PEG has been as high as 2.10 and as low as 0.96, with a median of 1.11, all within the past year.

Value investors also love the P/S ratio, which is calculated by simply dividing a stock's price with the company's sales. This is a prefered metric because revenue can't really be manipulated, so sales are often a truer performance indicator. CSGS has a P/S ratio of 1.37. This compares to its industry's average P/S of 1.62.

Finally, investors should note that CSGS has a P/CF ratio of 11.66. This metric focuses on a firm's operating cash flow and is often used to find stocks that are undervalued based on the strength of their cash outlook. This company's current P/CF looks solid when compared to its industry's average P/CF of 15.02. Over the past 52 weeks, CSGS's P/CF has been as high as 11.66 and as low as 8.36, with a median of 10.12.

These are only a few of the key metrics included in CSG Systems International's strong Value grade, but they help show that the stock is likely undervalued right now. When factoring in the strength of its earnings outlook, CSGS looks like an impressive value stock at the moment.

Zacks Investment Research