3 Top Stocks From the Prospering Consulting Services Industry

Encouraging manufacturing and service activities, along with the increased adoption and success of the work-from-home trend, are enabling the Zacks Consulting Services industry to support the demand environment. Gradual economic recovery backed by increased vaccination drives is boosting demand.

Service demand, innovation and acquisitions are helping Accenture plc ACN, CBIZ, Inc. CBZ and Franklin Covey Co. FC sail through these testing times.

About the Industry

Companies grouped under the Consulting Services category offer professional advice in management, IT, human resources, environmental regulations, logistics and marketing, real estate, serving multiple end markets. The space includes prominent names such as Accenture and Gartner IT. Amid the pandemic, key focus within the industry is currently on channelizing money and efforts toward more effective operational components, such as technology, digital transformation and data-driven decision-making. To position themselves suitably in the post-pandemic era and better utilize the opportunities that the economic recovery will bring, service providers are increasing their efforts toward formulating and reassessing strategic initiatives, identifying sources of demand and targeting end markets.

What's Shaping the Future of Consulting Services Industry?

Exponential Growth: This multi-billion-dollar industry has witnessed exponential growth since the 2008 financial crisis, enjoying a steady rate of revenue, profit and cash-flow growth. Consequently, the trend has enabled most industry players to pay out stable dividends.

Pandemic Resiliency: Consulting services is one of the least pandemic-affected industries. This is because, amid such a volatile situation, organizations have increased their search for advice that can help protect their employees and stay closer to consumers and shareholders. Further, this industry is one of the earliest pioneers of remote working that has now become an integral part of the new normal. The nature of work enables industry players to function efficiently through the increased use of technology.

Non-stop Service Demand: The sector is a major beneficiary of the economy, which is gradually gathering strength. A steady recovery is evident from the fourth-quarter 2021 GDP number, which according to the "advance" estimate released by the Bureau of Economic Analysis, grew at an annual rate of 6.9% compared with the increase of 2.3% in the third quarter. With manufacturing and service activities in the pink, the demand for services is rising steadily. Although the economic activity in the manufacturing sector shrunk 2.4% from November to December, with the Manufacturing PMI measured by the Institute for Supply Management (ISM) touching 58.7%, the reading of above 50% marked the 19th consecutive month of expansion. Non-manufacturing activities declined 7.1% in December from November’s all-time high of 69.1, as the Services PMI measured by the ISM touched 62%. With a reading above 50%, this is the 19th consecutive month of expansion of service activities.

Zacks Industry Rank Indicates Bright Prospects

The Consulting Services industry, which is housed within the broader Business Services  sector, currently carries a Zacks Industry Rank #38. This rank places it in the top 15% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates solid near-term growth prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

Analysts covering the companies in this industry have been steadily pushing their estimates north. Over the past year, the industry’s consensus earnings estimate for 2022 has moved 10.5% north.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and current valuation.

Industry Outperforms the S&P 500 and the Sector

Over the past year, the Consulting Services industry has outperformed the S&P 500 composite and the broader sector.

While the industry has rallied 37.3%, the S&P 500 composite gained 17.5%. The broader sector declined 41.8% in the said time frame.

One-Year Price Performance

Industry's Current Valuation

On the basis of the forward 12-month price-to-earnings (P/E), which is a commonly used multiple for valuing consulting services companies, we see that the industry is currently trading at 28.05X, above the S&P 500’s 19.71X and the sector’s 26.41X.

Over the past five years, the industry has traded as high as 35.21X, as low as 18.82X and at a median of 23.09X, as the charts below show.

Price to Forward 12 Months P/E Ratio

3 Consulting Services Stocks to Bet On

We present three stocks that currently carry a Zacks Rank #1 (Strong Buy) and are well-positioned for near-term growth. You can see the complete list of today’s Zacks #1 Rank stocks here.

Accenture: The professional services giant’s shares have gained 33.6% over the past year, driven by continued strength in its consulting and outsourcing businesses. On the outsourcing front, Accenture continues to see strong demand to assist clients with the operation and maintenance of digital-related services and cloud enablement. On the consulting front, the company experiences strong demand for digital, cloud- and security-related services.

Investors seem to have remained excited about Accenture’s acquisition spree and stellar quarterly results. The company’s results surpassed the Zacks Consensus Estimate for both earnings and revenues in the past four quarters. The recent acquisition of Tambourine is expected to boost Accenture's suite of sales and commerce transformation services, from product and platform engineering to omnichannel delivery of commerce experiences.

The Zacks Consensus Estimate for revenues for the current year indicates an 18.4% increase from the year-ago reported number. The Zacks Consensus EPS estimate for the year suggests a 19.8% year-over-year improvement. The consensus EPS estimate for the year has increased 4.2% over the past 60 days.

Price and Consensus: ACN

CBIZ: This provider of financial, insurance and advisory services has seen its stock price jump 42.6% over the past year on investor’s optimism about its acquisition spree and impressive quarterly results. The company has been seeing strength across all of its major service lines.

CBIZ posted better-than-expected results in the past four quarters. Acquisitions completed in 2020 and the first nine months of 2021 contributed 7.3% to the company’s revenues in the first three quarters of 2021.

The Zacks Consensus Estimate for revenues for the current year indicates a 14.7% year-over-year increase. The Zacks Consensus EPS estimate for the year suggests a 23.2% improvement from the year-ago reported number. The consensus EPS estimate for the year has remained unchanged at $1.75 over the past 60 days.

Price and Consensus: CBZ

Franklin Covey: This training and consulting services provider’s shares have charted a solid trajectory over the past year, gaining 82.4% on continued momentum in its subscription business and strength of its value proposition. Quality of content, flexibility in delivering content and services through all modalities and global sales and delivery network are considered key strengths of the company.

The Zacks Consensus Estimate for EPS for the current year has increased 22.6% over the past 60 days.

Price and Consensus: FC

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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