Despite the positives in the Business Services, we cannot ignore the headwinds limiting the positive impact of the catalysts mentioned in “Business Services Stocks to Gain from Improving Employment.”
Discussed below are some inherent challenges faced by the Business Services sector:
Continuous Spending on Research and Development: Importantly, consulting service providers need to stay abreast with the latest technologies through continuous spending on research and development. The performance of these providers can be hampered if they do not acclimatize to or adopt new services to cope with the latest developments.
Maintaining Skilled Workforce Involves High Costs: Since skilled workers are always in demand, there is a possibility of a high turnover rate in the sector. The training of unskilled workers or taking in new skilled workers increases operational costs, and thus affects margins. This space needs to have a more skilled workforce to take advantage of technology that develops at a rapid pace.
Competition: Maintaining or increasing market share remains challenging for business service providers. As discussed earlier, the main business of one company can be a business service for another. So target customers for both may at times be the same.
Therefore, a business service provider is always required to be adequately equipped to win over customer demand. While larger providers bank on the broad variety of service offerings and can effectively take up difficult ventures, the relatively smaller players compete in an industry backed by specialized services.
Regulatory Hurdles: By virtue of having operations across the globe, service providers face regulatory hurdles and compliance-related issues. The Western Union Company (WU - Free Report) expects compliance costs to be at the higher end of 3.5–4% in 2017.
Moneygram International Inc. (MGI - Free Report) is being probed by a federal grand jury in relation to its consumer anti-fraud and anti-money laundering program matters for 2003 to early 2009, among many other government investigations and litigations. Any adverse results from the investigation might lead to potential liability against damages, which could put pressure on margins and cash flows.
Based on an unfavorable Zacks Rank and downward estimate revision, we prefer to avoid Xerox Corporation (XRX - Free Report) and MITIE Group PLC. (MITFY - Free Report) . Each of these stocks carries a Zacks Rank #5 (Strong Sell).
The Trump Administration’s policy orientation is towards discouraging offshoring and outsourcing. It is not clear what measures the new administration will implement, but it is reasonable to expect incremental headwinds for consulting and outsourcing firms in the coming days.
You can see the complete list of today’s Zacks #1 Rank stocks here.
The dearth of skilled labor in the business services sector can affect its prospects. Non-availability of quality workforce at a reasonable rate might increase overall operational costs.
In addition, due to the highly fragmented nature of the industry, it is difficult to set a distinct trend or predict a concrete future for it.
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