The outsourcing industry is flourishing due to the rise of technology, digitization, and cloud migrations. The need for skilled professionals, cost savings, flexibility, scalability, and operational efficiency are some of the key factors driving the industry’s growth.
Amid this backdrop, it would be prudent to buy fundamentally strong outsourcing stocks Accenture plc (ACN), ICF International, Inc. (ICFI) and American Public Education, Inc. (APEI).
But before we dive deeper into the fundamentals of these stocks, let's first clearly understand some aspects of the industry.
Outsourcing is considered a popular business strategy as it enables businesses to achieve operational efficiency, helps to focus on critical business aspects, cuts costs, reduces dependency, improves productivity, and helps improve competitiveness. Across the world, organizations are turning to outsourcing for various reasons, ranging from management services, tech services, recruitment and education services.
The outsourcing industry is well-positioned for long-term growth due to the ever-rising demand for specialized skills, the growing adoption of emerging technologies like generative AI, cloud computing, and machine learning, the increasing complexity of business operations, the focus on improving competitive advantage by reducing costs and improving efficiency, etc.
Advancements in EdTech by leveraging IoT and AI fuel growth in the education outsourcing market. There is an increasing demand for personalized learning and low-cost and scalable learning systems. Educators are outsourcing to improve learning and development, enhance efficiency, address skill shortages, and reduce costs. The global learning services outsourcing market is anticipated to grow at a CAGR of 5.6% from 2023 to 2030.
Furthermore, widespread cloud migration, growing adoption of emerging technologies, and the high demand for cybersecurity solutions drive the demand for tech services. The global IT Services market is projected to grow at a CAGR of 9.7% to reach revenues of $2.59 trillion by 2030.
Moreover, the global IT outsourcing market is projected to expand at an 11.1% CAGR to reach revenues of $777.70 billion by 2028.
With these favorable trends in mind, let’s delve deeper into the fundamentals of the featured stocks.
Accenture plc (ACN)
Based in Dublin, Ireland, ACN is a professional services company that provides strategy and consulting, interactive, industry X, song, and technology and operation services worldwide. The company offers application services, data management, intelligent automation, and application management services, as well as software engineering services, strategy and consulting services, data and analytics strategy, etc.
On November 28, 2023, ACN acquired Incapsulate, a digital transformation consulting firm specializing in Salesforce solutions, fortifying ACN's capabilities in Salesforce services, particularly in the insurance and public sector industries. This acquisition enhances ACN's ability to accelerate digital transformation and provide greater business value to clients, leveraging Incapsulate's Salesforce expertise and experienced team of over 275 practitioners.
On November 27, 2023, ACN announced the completion of its acquisition of Solnet, an IT services provider with deep technology consulting experience for New Zealand government and private organizations across multiple industries.
The acquisition will expand CAN’s cloud and infrastructure engineering capabilities, helping clients utilize a full continuum of technology expertise to accelerate their digital transformation.
In terms of the trailing-12-month EBIT margin, ACN’s 15.80% is 230.2% higher than the 4.78% industry average. Likewise, its 10.72% trailing-12-month net income margin is 356.9% higher than the 2.35% industry average. Furthermore, its 28.75% trailing-12-month Return on Common Equity is significantly higher than the 1.13% industry average.
For the fiscal fourth quarter ended August 31, 2023, ACN’s revenues increased 3.6% year-over-year to $15.99 billion. The company’s adjusted operating income rose 5.2% year-over-year to $2.38 billion. Its adjusted net income stood at $1.76 billion. Also, its adjusted EPS came in at $2.71, representing an increase of 4.2% year-over-year.
Analysts expect ACN’s EPS and revenue for the quarter ended November 30, 2023, to increase 1.4% and 2.9% year-over-year to $3.12 and $16.20 billion, respectively. It surpassed the consensus EPS estimates in three of the trailing four quarters. The stock has gained 25.7% year-to-date to close the last trading session at $335.41.
ACN’s POWR Ratings reflect this promising outlook. It has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has an A grade for Quality and a B for Stability and Sentiment. It is ranked #3 out of 9 stocks in the A-rated Outsourcing – Tech Services industry. Click here to see ACN's additional Growth, Value, and Momentum ratings.
ICF International, Inc. (ICFI)
ICFI provides management, marketing, technology, and policy consulting and implementation services to government and commercial clients. It researches critical policy, industry, stakeholder issues, trends, and behaviors; measures and evaluates results and their impact; and provides clients strategic planning and advisory services on navigating societal, business, market, business, and other challenges.
On November 16, ICFI announced that the U.S. Department of Homeland Security (DHS), Immigration and Customs Enforcement (ICE), awarded it a $32 million task order to modernize ICE's homeland security investigations systems over five years, including a one-year base and four one-year option periods.
In terms of the trailing-12-month gross profit margin, ICFI’s 35.65% is 17.8% higher than the 30.28% industry average. Likewise, its 8.06% trailing-12-month levered FCF margin is 34.8% higher than the industry average of 5.98%. Furthermore, the stock’s 0.93x trailing-12-month asset turnover ratio is 17.2% higher than the industry average of 0.79x.
ICFI’s revenue for the third quarter that ended September 30, 2023, rose 7.2% year-over-year to $501.52 million. Its net income increased 24.3% year-over-year to $23.74 million. The company’s adjusted EBITDA increased 7.3% over the prior-year quarter to $54.28 million. Its non-GAAP EPS came in at $1.81, representing an increase of 12.4% year-over-year.
For the quarter ending December 31, 2023, ICFI’s EPS and revenue are expected to increase 4.7% and 1.1% year-over-year to $1.63 and $480.73 million, respectively. It has topped the Street EPS estimates in each of the trailing four quarters. The stock has gained 40.9% year-to-date to close the last trading session at $139.59.
It’s no surprise that ICFI has an overall rating of B, which translates to a Buy in our proprietary rating system.
ICFI has a B grade for Stability. Within the A-rated Outsourcing – Management Services industry, It is ranked #2 out of 5 stocks. To see the additional ratings of ICFI for Growth, Value, Momentum, Sentiment, and Quality, click here.
American Public Education, Inc. (APEI)
APEI provides online and campus-based postsecondary education and career learning, offering various degree and certificate programs in multiple fields of study. It operates through the American Public University System, Rasmussen University, and Hondros College of Nursing segments.
In terms of the trailing-12-month gross profit margin, APEI’s 50.85% is 43.4% higher than the 35.47% industry average.
APEI’s total revenue for the fiscal third quarter ended September 30, 2023, increased marginally year-over-year to $150.84 million. Its adjusted EBITDA rose 91.4% year-over-year to $18.10 million. The company’s APUS segment revenues rose 11.2% year-over-year to $76.41 million.
Street expects APEI’s revenue for the quarter ending March 31, 2024, to increase 0.5% year-over-year to $150.41 million. Over the past month, the stock has gained 65% to close the last trading session at $7.46.
APEI’s POWR Ratings reflect strong prospects. It has an overall rating of A, translating to a Strong Buy in our proprietary system.
It has an A grade for Growth and a B for Value, Sentiment and Quality. It is ranked #2 out of 20 stocks in the A-rated Outsourcing - Education Services industry. To access APEI’s ratings for Momentum and Stability, click here.
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ACN shares were trading at $335.79 per share on Thursday afternoon, up $0.38 (+0.11%). Year-to-date, ACN has gained 27.84%, versus a 21.13% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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