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3 Top Stocks From the Flourishing Business Services Industry

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Rise in manufacturing and service activities, along with the increased adoption and success of the work-from-home trend, is enabling the Zacks Business-Services industry to support the demand environment that is getting healthier with the gradual economic recovery.

Service essentiality, technology enhancements and cost-control measures are helping WNS (Holdings) Limited (WNS - Free Report) , Healthcare Services Group, Inc. (HCSG - Free Report) and General Finance Corporation to sail through these testing times.

 About the Industry

The Zacks Business-Services industry comprises companiesthat offer a range of services, including specialty rental, supply-chain management, electronic commerce, technology, document management, digital audience, data, voice, analytical, and business transformation among others.

What’s Shaping the Future of Business Services Industry?

Demand Stability: The industry is mature with demand for services being in good shape over time. Revenues and cash flows have been stable over the past few years, enabling most industry players to pay out stable dividends.

Economic Recovery: With the coronavirus pandemic hitting the economy hard, demand for business services has dropped in the past few months. However, with the economy gradually swinging back to normalcy, and both manufacturing and service activities gathering steam, demand is anticipated to rise steadily. Although manufacturing activities edged down 0.6% from August to September, with the Purchasing Managers Index (PMI) measured by Institute for Supply Management (ISM) touching 55.4%, the reading stayed well above 50 — reflecting growth in the manufacturing sector. This is the fourth consecutive month of expansion after a two-month period of contraction that followed 122 straight months of expansion. Notably, economic activity in the non-manufacturing sector expanded 0.9% from August to September as the Services PMI measured by ISM touched 57.8%. This is the fifth consecutive month of expansion after April’s contraction that had interrupted an impressive growth rally of 131 consecutive months.

Heightening Immigration Restrictions: Higher talent costs due to a competitive talent market and President Trump’s increasing restrictions on immigration amid the pandemic will  continue being headwinds for the industry. Further, service providers face regulatory hurdles and compliance-related issues due to operations across the globe.

Zacks Industry Rank Indicates Bright Prospects

The Business-Servicesindustry is housed within the broader Business Services sector. It carries a Zacks Industry Rank #94, which places it in the top 37% of more than 250 Zacks industries.

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

Before we present a few stocks that have the potential to outperform the market, it’s worth taking a look at the industry’s performance and current valuation.

Industry Underperforms the S&P 500 and Sector

The Zacks Business-Services industry has underperformed the S&P 500 composite as well as the broader Zacks Business Services sector over the past year.

The industry has declined 6.9% during this period as against the S&P 500 composite’s rally of 17.4%. The broader sector has depreciated 6.6% during the same time period.

One-Year Price Performance

Industry’s Current Valuation

On the basis of the forward 12-month price-to-earnings (P/E) ratio, which is commonly used for valuing business-services stocks, the industry is currently trading at 13.72 compared with the S&P 500’s 22.61 and the sector’s 29.33.

Over the past five years, the industry has traded as high as 32.26X, as low as 11.08X and at the median of 23.71X, as the charts below show.

Price to Forward 12 Month P/E Ratio

3 Business Service Stocks to Bet On

We are presenting three stocks that currently carry a Zacks Rank #2 (Buy) and are well positioned to grow in the near term. You can see the complete list of today’s Zacks #1 Rank stocks here.

WNS (Holdings) Limited: The company provides data, voice, and analytical and business transformation services. While the pandemic has had a negative impact on the company’s top line, its margins and free cash flow are healthy. This is mainly because it has successfully synced its delivery model with the work-from-home approach.

The Zacks Consensus Estimate for the ongoing year’s EPS has been revised 1.3% upward in the past 60 days. The stock has surged 49.7% over the past six months.

Price and Consensus: WNS

Healthcare Services Group, Inc.: The company is a provider of management, administrative, and operating services to hospitals, nursing homes, rehabilitation centers and retirement complexes. Its operating performance and service execution have been robust during the pandemic. Factors such as efficient systems implementation and adherence, increasing customer-payment frequency and management recruitment, prudent investments in technology and programmatic enhancements are helping Healthcare Services sail through the testing times.

The Zacks Consensus Estimate for the 2020 EPS has moved 0.9% north in 60 days’ time. Shares of the company have rallied 4.3% in the past six months.

Price and Consensus: HCSG

General Finance Corporation: The company is a provider of portable storage, modular space and liquid containment solutions. Its business has been considered essential and therefore, remained open across all of the company’s locations working under flexible work practices. General Finance has seen strength in its core container business amid the pandemic and implemented cost-containment measures.

The Zacks Consensus Estimate for the current-year EPS has moved 7.4% north in the past 60 days. The stock has appreciated 11.9% over the past six months.

Price and Consensus: GFN

 

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See More Zacks Research for These Tickers


Normally $25 each - click below to receive one report FREE:


Healthcare Services Group, Inc. (HCSG) - free report >>

WNS (Holdings) Limited (WNS) - free report >>

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