The tech industry has been under pressure since last year due to the Federal Reserve’s aggressive interest rate hikes to bring inflation down. According to Gartner, spending on tech services contracted 0.2% in 2022 to $4.38 trillion.
However, spending on tech services is expected to grow in the long term thanks to the growing demand for digital transformation, cloud computing, artificial intelligence, cybersecurity, etc. Amid this backdrop, it could be wise to buy fundamentally strong tech stocks Information Services Group, Inc. (III), Mastech Digital, Inc. (MHH), and Key Tronic Corporation (KTCC).
Before diving deeper into the fundamentals of these stocks, let’s discuss why the tech services industry is well-positioned for growth.
Inflation continued to ease as the consumer price index (CPI) in May rose 4% year-over-year, coming in lower than the estimates. Thanks to the cooling inflation, the central bank kept its benchmark interest rate steady for the first time in over a year. However, it has kept the door open for two more smaller rate hikes by the end of the year.
A pause in the interest rate hike could be beneficial for tech companies. Moreover, the adoption of advanced technologies like Virtual reality (VR), augmented reality (AR), artificial intelligence (AI), Internet of Things (IoT), and mixed reality (MR) and the digital transformation of enterprises is expected to boost the demand for tech services.
Gartner expects Worldwide IT services spending in 2023 to rise 9.1% year-over-year to $1.36 trillion. According to the IDC, the worldwide IT and business services revenue is expected to grow 5.7% year-over-year to $1.2 trillion in 2023.
Considering these factors, it could be wise to buy the featured stocks. Let’s take a closer look at their fundamentals.
Information Services Group, Inc. (III)
III is a technology research and advisory company. It provides digital transformation services, sourcing advisory, governance and risk management, technology strategy, and market intelligence services. The company supports private and public sector organizations to transform and optimize their operations. It also offers client solution platforms like ISG Digital and ISG Enterprise.
On May 11, 2023, III introduced ISG Automation on Demand, a cloud-hosted platform-as-a-service for automation. It offers managed services for popular automation tools like RPA, NLP, and IDP. The platform enables end-to-end automation of business processes and handles users’ automation infrastructure, licenses, and maintenance on a consumption-based model.
In terms of the trailing-12-month EBITDA margin, III’s 11.89% is 46.1% higher than the 8.14% industry average. Likewise, its 6.26% trailing-12-month net income margin is 217.2% higher than the 1.97% industry average. Furthermore, the stock’s 1.22x trailing-12-month asset turnover ratio is 101.2% higher than the 0.61x industry average.
III’s revenues for the first quarter ended March 31, 2023, increased 8.2% year-over-year to $78.49 million. The company’s adjusted net income and EPS came in at $6 million and $0.12, respectively. Additionally, its adjusted EBITDA increased 3.2% year-over-year to $10.98 million.
Street expects III’s EPS for the quarter ending December 31, 2023, to increase 7.7% year-over-year to $0.14. Its revenue for the quarter ending June 30, 2023, to increase 5.2% year-over-year to $74.37 million. It surpassed the Street EPS estimates in each of the trailing four quarters.
Over the past six months, the stock has gained 29.4% to close the last trading session at $5.85.
III’s POWR Ratings reflect strong prospects. It has an overall rating of B, which translates to a Buy in our proprietary system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It is ranked #11 out of 80 stocks in the Technology - Services industry. It has a B grade for Stability and Sentiment. Click here to see III’s rating for Growth, Value, Momentum, and Quality.
Mastech Digital, Inc. (MHH)
MHH provides digital transformation IT services to large, medium-sized, and small companies. It operates through two segments: Data and Analytics Services, and IT Staffing Services.
The company offers data management and analytics services, including project-based consulting services in the areas of master data management, enterprise data integration, big data and analytics, and digital transformation.
On May 31, 2023, MHH announced its entry into the Engineering Staffing Services business. MHH’s latest offering will provide tailored staffing solutions to recruit reliable talent for mission-critical engineering needs across various industries like manufacturing, automobiles, energy, etc.
MHH’s President and CEO Vivek Gupta said, “We live in interesting times with AI and Industry 4.0 defining the future of engineering innovation and advancements across most industries. Having a proven track record of sourcing and onboarding best in class IT skills expeditiously, we now want to also become the ‘go-to’ partner for any enterprise seeking top-notch engineering talent.”
In terms of the trailing-12-month levered FCF margin, MHH’s 6.10% is 17% higher than the 5.21% industry average. Likewise, its 2.11x asset turnover ratio is 163.8% higher than the 0.80x industry average. Additionally, the stock’s 7.29% trailing-12-month return on total capital is 4.6% higher than the industry average of 6.97%.
MHH’s total revenues for the first quarter ended March 31, 2023, came in at $55.06 million. Its gross profit came in at $13.48 million. Its non-GAAP net income and EPS came in at $1.40 million and $0.12, respectively.
For the fiscal period ending December 31, 2023, MHH’s EPS and revenue are expected to increase 96.2% and 7.5% year-over-year to $1.28 and $240.02 million, respectively. Over the month, the stock has gained 14.9% to close the last trading session at $10.80.
MHH’s positive outlook is reflected in its POWR Ratings. The stock has an overall rating of B, equating to a Buy in our proprietary rating system.
It has a B grade for Value and Quality. It is ranked #13 in the same industry. To see MHH’s ratings for Growth, Momentum, Stability, and Sentiment, click here.
Key Tronic Corporation (KTCC)
KTCC provides contract manufacturing services to original equipment manufacturers (OEM). The company offers integrated electronic and mechanical engineering, assembly, sourcing and procurement, logistics, and new product testing services.
In terms of the trailing-12-month return on total capital, KTCC’s 2.39% is 43.6% higher than the 1.66% industry average. Likewise, its 1.31x asset turnover ratio is 115.5% higher than the 0.61x industry average. Additionally, the stock’s 1.17% trailing-12-month Return on Total Assets is significantly higher than the industry average of 0.02%.
For the fiscal third quarter ended April 01, 2023, KTCC’s net sales increased 18.9% year-over-year to $164.55 million. Its gross profit increased 24.1% year-over-year to $14.28 million. Its net income rose 96.2% over the prior-year quarter to $1.98 million. In addition, its EPS came in at $0.18, representing an increase of 100% year-over-year.
Over the past nine months, the stock has gained 31.3% to close the last trading session at $5.62.
KTCC’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which translates to a Buy in our proprietary rating system.
It has an A grade for Growth and Momentum and a B for Value, Stability, and Sentiment. Within the Technology – Services industry, it is ranked #12. To see KTCC’s rating for Quality, click here.
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III shares were trading at $5.85 per share on Monday morning, up $0.53 (+9.96%). Year-to-date, III has gained 29.35%, versus a 15.35% 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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