Increasing digital transformation initiatives are driving up demand for technological services. This trend is being driven by an increasing reliance on cloud computing, data analytics, and AI, all of which are critical components of digital transformation strategies.
Considering these factors, it could be wise to buy fundamentally strong tech stock Xerox Holdings Corporation (XRX), Information Services Group, Inc. (III) and Sanmina Corporation (SANM).
Before delving deeper into their fundamentals, let’s discuss what’s happening in the tech industry.
Digital transformation is a game changer in the technology industry because it changes how businesses operate and interact with customers. It enables businesses to improve processes, increase productivity, and provide consumers with individualized experiences.
Also, digital transformation creates new chances for innovation, allowing businesses to remain competitive in an ever-changing technology context.
Statista forecasts the global IT Services market will grow at a 7.4% annual growth, resulting in a market of $1.77 trillion by 2028. This expansion can be attributed to an increase in demand for digital transformation and cloud computing solutions across a variety of industries. The market is likely to grow significantly in the coming years as organizations continue to prioritize technology integration and outsourcing IT services.
Moreover, investors’ interest in tech stocks is evident from the iShares Expanded Tech Sector ETF’s (IGM) 9.8% returns over the past six months and 20.2% over the past nine months.
In light of these encouraging trends, let’s look at the fundamentals of the three top-rated Technology - Services stocks, beginning with number 3.
Stock #3: Xerox Holdings Corporation (XRX)
XRX designs, develops, and sells document management systems and solutions in the Americas, Europe, the Middle East, Africa, India, and internationally. It offers workplace solutions, including color and multifunction printers, digital services that leverage workflow automation, personalization and communication software, content management solutions, and digitization services.
XRX’s trailing-12-month EV/Sales of 0.69x is 70.9% lower than the industry average of 2.38x. Its trailing-12-month Price/Sales of 0.22x is 90.7% lower than the industry average of 2.32x.
XRX’s trailing-12-month ROCE of 5.50% is 387.6% higher than the industry average of 1.13%. Its trailing-12-month ROTA of 1.72% is significantly higher than the 0.03% industry average.
XRX’s revenues for the third quarter ended September 30, 2023, came in at $1.65 billion. Additionally, its adjusted net income stood at $77 million, compared to a net income of $44 million in the year ago quarter. Its adjusted EPS came in at $0.46, compared to a loss per share of $0.27 in the year ago quarter.
Analysts expect XRX’s EPS to increase 75.5% year-over-year to $1.97 for the year ending December 2023. It surpassed EPS estimates in three of four trailing quarters. Shares of XRX has gained marginally intraday to close the last trading session at $12.27.
XRX’s POWR Ratings reflect this promising outlook. The stock 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.
XRX also has an A grade for Value and a B for Quality. It is ranked #25 out of 74 stocks in the Technology - Services industry. Click here for the additional POWR Ratings for Growth, Stability, Momentum and Sentiment for XRX.
Stock #2: Information Services Group, Inc. (III)
III is a technology research and advisory company offering digital transformation, risk management, and technology research services to private and public sector organizations. Its platforms, ISG Digital and ISG Enterprise, aid in technology solutions and operational optimization. It also provides ISG GovernX, a software platform for supplier relationship management.
III’s forward EV/EBIT multiple of 9.16 is 45.9% lower than the industry average of 16.93. Its forward non-GAAP multiple of 8.96% is 55.8% lower than the industry average of 20.24.
III’s trailing-12-month ROCE of 15.85% is significantly higher than the 1.13% industry average. Its trailing-12-month ROTA of 6.56x is significantly higher than the 0.03x industry average.
III’s revenues for the second quarter that ended June 30, 2023, increased 5.5% year-over-year to $74.61 million. The company reported an adjusted operating income of $5.06 million. Also, its adjusted net income and adjusted EPS came in at $5.29 million and $0.11, respectively.
Street expects III’s revenue to increase 6.4% year-over-year to $304.8 million for the year ending December 2023. Its EPS is expected to come in at $0.45 for the same period. III’s shares have gained marginally intraday to close the last trading session at $4.03.
It’s no surprise that III has an overall B rating, equating to a Buy in our POWR Ratings system. It has a B grade for Stability, Value, and Sentiment. It is ranked #19 in the same industry.
Beyond what is stated above, we’ve also rated III for Growth, Momentum and Quality. Get all III ratings here.
Stock #1: Sanmina Corporation (SANM)
SANM is a global provider of integrated manufacturing solutions, products, and services. It operates in two segments: Integrated Manufacturing Solutions; Components, Products and Services, serving various industries, including industrial, medical, defense, automotive, communications, and more.
SANM’s forward non-GAAP P/E of 7.97x is 60.6% lower than the industry average of 20.24x. Its forward non-GAAP PEG multiple of 0.49 is 70.3% lower than the industry average of 1.65.
SANM’s trailing-12-month ROTA of 6.18% is significantly higher than the industry average of 0.03%. Its trailing-12-month asset turnover ratio of 1.88x is 204.4% higher than the 0.62x industry average.
For the fiscal third quarter that ended on July 1, 2023, SANM’s net sales increased 9.1% year-over-year to $2.21 billion, while gross profit increased 13% from the year-ago value to $183.21 million. Its non-GAAP net income attributable to common shareholders came in at $92.16 million and $1.55 per share, up 19% and 23% year-over-year, respectively.
The consensus revenue estimate of $9.28 billion for the year ending September 2024 represents a 2.7% increase year-over-year. Its EPS is expected to grow at 6.1% year-over-year to $6.31 for the same period. It surpassed EPS estimates in all four trailing quarters. SANM’s shares have lost marginally intraday to close the last trading session at $50.30.
SANM’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system.
It is ranked #18 in the same industry. It has an A grade for Momentum and a B for Value. To see additional SANM’s ratings for Growth, Sentiment, Stability and Quality, click here.
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SANM shares were trading at $50.81 per share on Tuesday morning, up $0.51 (+1.01%). Year-to-date, SANM has declined -11.31%, versus a 9.95% rise in the benchmark S&P 500 index during the same period.
About the Author: Rashmi Kumari
Rashmi is passionate about capital markets, wealth management, and financial regulatory issues, which led her to pursue a career as an investment analyst. With a master's degree in commerce, she aspires to make complex financial matters understandable for individual investors and help them make appropriate investment decisions.
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