The escalating popularity of outsourcing is rooted in its cost-effectiveness, allowing businesses to allocate resources strategically to core activities. Additionally, the prospect of a diverse global talent pool and round-the-clock operations enhances its allure as a dynamic and efficient business strategy.

Against the backdrop, this piece explores the fundamentals of three sound outsourcing stocks, Cognizant Technology Solutions Corporation (CTSH), ICF International, Inc. (ICFI), and RCM Technologies, Inc. (RCMT), which appear well-positioned to capitalize on the industry’s promising prospects.

Outsourcing has been on the rise due to its cost-efficiency, enabling companies to access a global talent pool. The flexibility it offers in scaling operations, coupled with technological advancements, has made outsourcing an attractive option for businesses all over the world.

According to Statista, the global IT outsourcing market is projected to hit $512.50 billion in 2024 and surge to $777.70 billion by 2028, with an impressive CAGR of 11% from 2024 to 2028. This data underscores the mounting reliance on outsourcing to meet a diverse range of IT needs.

Furthermore, businesses are increasingly opting to outsource their recruitment and staffing processes to fulfill their workforce requirements.

The growing need for efficient recruitment practices and the inclination towards outsourcing these processes to external providers are anticipated to fuel the expansion of the Recruitment Process Outsourcing (RPO) market. Projections indicate that the global RPO market is set to grow at a 16.1% CAGR from 2023 to 2030.

In addition to the growing demand for outsourcing across various business verticals, the integration of Artificial Intelligence (AI)  has significantly bolstered the prospects of the outsourcing industry. Many outsourcing firms recognize the pivotal role of AI-powered automation and are incorporating this technology to streamline workflows, automate repetitive tasks, and augment human capabilities.

This year, there is a heightened emphasis on AI-powered automation, with outsourcing entities leveraging this technology for greater personalization, predictive analytics, and deeper system integration.

Keeping all these factors in mind, let’s now examine the fundamentals of the featured outsourcings stocks in detail:

Cognizant Technology Solutions Corporation (CTSH)

CTSH provides consulting, technology, and outsourcing services internationally. It operates through four segments: Financial Services; Health Sciences; Products and Resources; and Communications, Media and Technology.

On January 4, 2024, CTSH announced that it had been chosen by Fortrea, a leading global provider of clinical development and patient access solutions, as its strategic technology transformation provider.

Through this collaboration, CTSH will assist Fortrea in advancing its mission and providing solutions to pharmaceutical, biotechnology, and medical device customers, all while maintaining a robust and secure digital infrastructure.

On December 13, 2023, CTSH announced its agreement to acquire Thirdera, an Elite ServiceNow Partner, offering advisory, implementation, and optimization solutions for the ServiceNow platform, with a particular emphasis on emerging enterprise workflow products.

This acquisition aligns with the strategic partnership between CTSH and ServiceNow, working towards establishing a joint business with a focus on AI-driven automation and a goal of reaching $1 billion.

CTSH’s trailing-12-month EBIT margin of 14.99% is 204.7% higher than the 4.92% industry average. Its trailing-12-month net income margin of 10.75% is 355.8% higher than the industry average of 2.36%. Furthermore, its trailing-12-month asset turnover ratio of 1.10x is 77.5% higher than the 0.62x industry average.

For the fiscal third quarter, which ended on September 30, 2023, CTSH’s revenues increased marginally year-over-year to $4.90 billion, while its adjusted income from operations came in at $758 million.

During the same period, the company’s net income and EPS amounted to $525 million and $1.04, respectively. In addition, its total assets stood at $18.08 billion, up 1.3% compared to $17.85 billion as of December 31, 2022.

Analysts predict CTSH’s EPS for the fiscal fourth quarter (ended December 2023) to increase 2.8% year-over-year to $1.04, while its revenue for the same period is expected to come in at $4.77 billion. Moreover, the company topped its EPS and revenue estimates in three of the trailing four quarters, which is Impressive.

Over the past six months, the stock has gained 9.6% to close the last trading session at $74.88.

CTSH’s POWR Ratings reflect this promising outlook. The stock has an overall B rating, translating to a 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 and Quality. In the A-rated nine stock Outsourcing - Tech Services industry, it is ranked #2. Click here to see CTSH’s ratings for Growth, Value, Momentum, and Sentiment. 

ICF International, Inc. (ICFI)

ICFI provides management, marketing, technology, and policy consulting and implementation services to government and commercial clients in the United States and internationally. It serves energy, environment, and infrastructure; health, education, and social programs; and safety and security markets.

On January 12, 2024, ICFI paid its shareholders a quarterly dividend of $0.14 per share. The company’s annual dividend of $0.56 translates to a 0.43% yield on the prevailing prices, while its four-year average dividend yield is 0.62%.

On December 11, 2023, ICFI secured a new task order valued at $78 million from the U.S. Department of Agriculture's (USDA) U.S. Forest Service (USFS).

Under this task order, ICFI will leverage its expertise in disaster management and climate solutions, as well as utilize cloud-native geospatial technology and advanced analytics to modernize the USFS' Fire and Aviation Management Enterprise Geospatial Portal (EGP).

The EGP plays a crucial role by providing standardized geospatial information on wildfire activities. With a human-centered design approach, ICFI will create a seamless and scalable solution called "EGP Next Gen," aiming to empower the wildland fire community to make swift, data-driven decisions in a mission-critical environment.

The stock’s trailing-12-month levered FCF margin of 8.06% is 34.7% higher than the 5.98% industry average. Its trailing-12-month gross profit margin of 35.65% is 17.8% higher than the industry average of 30.28%. Furthermore, ICFI’s trailing-12-month asset turnover ratio of 0.93x is 16% higher than the 0.80x industry average.

ICFI’s revenue for the fiscal third quarter (ended September 30, 2023) increased 7.2% year-over-year to $501.52 million, while its adjusted EBITDA improved 7.3% from the prior-year quarter to $54.28 million. The company’s net income rose 24.3% from the year-ago value to $23.74 million. Also, its non-GAAP EPS came in at $1.81, representing an increase of 12.4% year-over-year.

Analysts predict ICFI’s revenue and EPS for the fiscal fourth quarter (ended December 2023) to increase 1.1% and 4.7% year-over-year to $480.73 million and $1.63, respectively. Moreover, the company surpassed the EPS estimates in each of the trailing four quarters, which is promising.

The stock has gained 9.1% over the past six months to close the last trading session at $131.56.

ICFI’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which equates to Buy in our proprietary rating system.

It has a B grade for Stability and Sentiment. Within the A-rated five stock Outsourcing - Management Services industry, it is ranked #2. Click here to see the other ratings of ICFI for Growth, Value, Momentum, and Quality.   

RCM Technologies, Inc. (RCMT)

RCM provides business and technology solutions. It operates through three segments: Engineering; Specialty Health Care; and Life Sciences and Information Technology.

RCMT’s trailing-12-month levered FCF margin of 11.35% is 89.7% higher than the 5.98% industry average. Its trailing-12-month Return On Common Equity (ROCE) of 56.50% is 361.9% higher than the industry average of 12.23%. Furthermore, the stock’s trailing-12-month asset turnover ratio of 2.95x is 267.5% higher than the 0.80x industry average.

For the fiscal third quarter, which ended September 30, 2023, RCMT’s revenue amounted to $58.05 million, while its adjusted EBITDA came in at $4.62 million.

The company’s net income and EPS improved 6.8% and 39.4 from the prior-year quarter to $3.76 million and $0.46, respectively. Additionally, its total current assets stood at $72.97 million, up 23.6% compared to $59.02 million as of December 31, 2022.

The consensus EPS estimate of $0.67 for the fiscal fourth quarter (ended December 2023) represents a 42.6% year-over-year improvement. While the consensus revenue estimate of $72.29 million for the same period reflects a 2.9% year-over-year rise.

Moreover, the company has an excellent surprise history, surpassing the revenue and EPS estimates in each of the trailing four quarters.

RCMT’s shares have soared 48.3% over the past three months to close the last trading session at $28.89.

It’s no surprise that RCMT has an overall rating of A, which equates to a Strong Buy in our proprietary rating system. It has an A grade for Quality and a B for Growth, Value, and Sentiment. Out of 18 stocks in the A-rated Outsourcing - Staffing Services industry, it is ranked #2.  

In addition to the POWR Ratings we’ve stated above, we also have RCMT’s ratings for Momentum and Stability. Get all RCMT ratings here.

What To Do Next?

Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these “death trap” stocks are lurking in your portfolio:

10 Stocks to SELL NOW! >

CTSH shares were trading at $78.03 per share on Friday morning, up $3.15 (+4.21%). Year-to-date, CTSH has gained 3.31%, versus a 0.21% rise in the benchmark S&P 500 index during the same period.

Anushka's ultimate aim is to equip investors with essential knowledge that empowers them to make well-informed investment choices and attain sustained financial prosperity in the long run.

More...