The outsourcing industry is well-positioned for growth due to global technology trends, the adoption of advanced technologies, and cloud migrations. The ongoing need for skilled professionals, cost savings, operational flexibility, and innovation are driving the global demand for outsourcing services.

Amidst this backdrop, investors could consider buying fundamentally strong outsourcing stocks: The Hackett Group, Inc. (HCKT) and Crawford & Company (CRD-A). On the other hand, investors could wait for better entry points in Graham Holdings Company (GHC) and Korn Ferry (KFY).

Before diving deeper into the fundamentals of these stocks, let’s discuss why the outsourcing industry is well-positioned for growth.

Organizations rely on outsourcing and staffing services to streamline project management, accelerate hiring processes, cut costs, and sustain business productivity. Hence, the outsourcing industry thrives on strategically delegating non-core tasks to external specialists, enhancing efficiency, flexibility, and access to specialized skills.

The rising demand for effective recruiting and the trend of outsourcing recruitment to third-party providers are expected to drive growth in the Recruitment Process Outsourcing (RPO) market. The global RPO market size is projected to reach $89.60 billion by 2027, expanding at a CAGR of 6.6%.

In addition, the growing adoption of emerging technologies and rising demand for cybersecurity solutions are boosting the demand for tech services outsourcing. The global IT outsourcing market is expected to grow significantly from $512.50 billion in 2024 to $777.70 billion by 2028, expanding at an 11% CAGR, reflecting increased reliance on outsourcing for diverse IT needs.

Similarly, in their efforts to focus on their core operations, enterprises are outsourcing non-core business activities. The business process outsourcing market is projected to reach $525.20 billion by 2030, growing at a CAGR of 9.1%.

Furthermore, the integration of the Internet of Things (IoT) and Artificial Intelligence (AI) in EdTech solutions is driving growth in the education outsourcing market. The global learning services outsourcing market is forecasted to expand at a 5.6% CAGR from 2023 to 2030, driven by heightened demand for personalized learning and efficient grading.

Let’s take a closer look at the fundamentals of the above-mentioned outsourcing stocks.

Stocks to Buy:

Hackett Group Inc. (HCKT)

HCKT is a global strategic advisory and technology consulting firm. It has three segments: Global Strategy & Business Transformation, Oracle Solutions, and SAP Solutions. The company provides online resources, best practice accelerators, advisory services, research insights, peer interaction, benchmarking services, business transformation practices, and Oracle and SAP solutions for clients’ specific needs.

In terms of the trailing-12-month net income margin, HCKT’s 12.47% is 451.3% higher than the 2.26% industry average. Likewise, its 20.36% trailing-12-month EBITDA margin is 122.1% higher than the industry average of 9.16%. Furthermore, the stock’s 1.43x trailing-12-month asset turnover ratio is 132% higher than the industry average of 0.61x.

For the third quarter ended September 29, 2023, HCKT’s total revenues increased 5.3% year-over-year to $75.86 million. Its operating income came in at $13.74 million. In addition, the company’s adjusted net income came in at $11.42 million. Its adjusted net income per common share stood at $0.41, representing an increase of 10.8% over the prior-year quarter.

Analysts expect HCKT’s EPS and revenue for the quarter ended December 31, 2023, to increase 2.8% and 0.9% year-over-year to $0.37 and $70.76 million, respectively. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past nine months, the stock has gained 25.3% to close the last trading session at $23.36.

HCKT’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of A, which translates to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

It has a B grade for Stability, Sentiment, and Quality. Within the A-rated Outsourcing – Tech Services industry, it is ranked first out of 9 stocks. To see HCKT’s Growth, Value, and Momentum ratings, click here.

Crawford & Company (CRD-A)

CRD-A provides claims management and outsourcing solutions for carriers, brokers, and corporations in the United States, the United Kingdom, Europe, Canada, Australia, Asia, and Latin America. The company operates through four segments: North America Loss Adjusting, International Operations, Broadspire, and Platform Solutions.

In terms of the trailing-12-month Return on Total Capital, CRD-A’s 10.55% is 64.9% higher than the 6.40% industry average. Likewise, its 2.10% trailing-12-month Return on Total Assets is 93.7% higher than the industry average of 1.08%. Furthermore, the stock’s 1.56x trailing-12-month asset turnover ratio is 633.1% higher than the industry average of 0.21x.

CRD-A’s total revenues for the third quarter, which ended September 30, 2023, increased 10.3% year-over-year to $337.66 million. The company’s total costs and expenses decreased 5.6% over the prior-year quarter to $316.51 million. Additionally, its net income and EPS stood at $12.17 million and $0.25, respectively, compared to its year-ago net loss of $15.25 million and $0.31 per share.

For the quarter ending March 31, 2024, CRD-A’s revenue is expected to increase 10.7% year-over-year to $346.32 million. Its EPS for the fiscal year 2023 is expected to increase 51.4% year-over-year to $1.06. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 120.8% to close the last trading session at $13.16.

It’s no surprise that CRD-A has an overall rating of A, which translates to a Strong Buy in our POWR Ratings system.

It has an A grade for Sentiment and a B for Growth, Value, and Stability. It is ranked #4 out of 42 stocks in the B-rated Outsourcing – Business Services industry. To access CRD-A’s grades for Momentum and Quality, click here.

Stocks to Watch:

Graham Holdings Company (GHC)

GHC and its subsidiaries operate as a diversified education and media company internationally. The company offers test prep services, professional training, and operational support for Purdue University Global. They provide online course support, accounting and finance training, English language prep, and A-level exam prep, and operate colleges and an online learning institution.

In terms of the trailing-12-month EBIT margin, GHC’s 8.22% is 9.7% higher than the 7.49% industry average. Its 8.35% trailing-12-month levered FCF margin is 45.4% higher than the 5.74% industry average. However, the stock’s 2.36% trailing-12-month Return on Total Assets is 43% lower than the 4.15% industry average.

GHC’s operating revenues for the third quarter ended September 30, 2023, increased 9.8% year-over-year to $1.11 billion. On the other hand, its operating loss stood at $57.11 million. In addition, the company’s net loss attributable to GHC common stockholders came in at $23.03 million or 5.02 per share.

Street expects GHC’s revenue for the quarter ended December 31, 2023, to increase 9.9% year-over-year to $1.17 billion. Its EPS for the same quarter is expected to decrease 33.4% year-over-year to $12.53. Over the past nine months, the stock has gained 25.8% to close the last trading session at $728.50.

GHC’s bleak fundamentals are reflected in its POWR Ratings. It has an overall rating of C, which translates to a Neutral in our proprietary rating system.

It has a C grade for Growth, Momentum, and Sentiment. Within the Outsourcing – Education Services industry, it is ranked #12 out of 21 stocks. Click here to access GHC’s Value, Stability, and Quality ratings.

Korn Ferry (KFY)

KFY and its subsidiaries provide organizational consulting services worldwide. They operate through four segments: Consulting, Digital, Executive Search, Recruitment Process Outsourcing (RPO) & Professional Search.

In terms of the trailing-12-month levered FCF margin, KFY’s 10.02% is 55.6% higher than the 6.44% industry average. Its 8.03% trailing-12-month Return on Total Capital is 17.2% higher than the 6.85% industry average. On the other hand, the stock’s 21.70% trailing-12-month gross profit margin is 28.7% lower than the 30.45% industry average.

For the fiscal second quarter, which ended October 31, 2023, KFY’s total revenues decreased 3.2% year-over-year to $712.45 million. Its adjusted net income attributable to KFY and adjusted EPS declined 33% and 32.3% over the prior-year quarter to $51.04 million and $0.97, respectively.

However, as of October 31, 2023, the company’s total assets stood at $3.36 billion, compared to $3.57 billion as of April 30, 2023. Likewise, its total liabilities as of October 31, 2023, amounted to $1.70 billion, compared to $1.92 billion as of April 30, 2023.

For the quarter ended January 31, 2024, KFY’s EPS and revenue are expected to decrease 1.9% and 3.3% year-over-year to $0.99 and $658.45 million, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past nine months, the stock has gained 23.8% to close the last trading session at $58.76.

KFY’s uncertain outlook is reflected in its POWR Ratings. It has an overall rating of C, equating to a Neutral in our proprietary rating system.

It has a C grade for Growth, Value, Momentum, Stability, Sentiment, and Quality. Within the Outsourcing – Staffing Services industry, it is ranked #13 out of 18 stocks. Get all the KFY ratings here.

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GHC shares were trading at $718.66 per share on Tuesday afternoon, down $9.84 (-1.35%). Year-to-date, GHC has gained 3.42%, versus a 4.16% rise in the benchmark S&P 500 index during the same period.

About the Author: Abhishek Bhuyan

Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments. More...

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