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Near-Term Outlook for Business Services Industry Gloomy

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

The industry’s performance is a function of the health of the broader economy. Trump’s policies have aided the economy through 2018. Government spending, especially in defense, and the tax reform have helped it gain traction to the extent that the Federal Reserve raised its key interest rate four times this year.

Here are the industry’s three major themes:

  • The industry is firmly tied to manufacturing and non-manufacturing activities that are currently benefiting from strength in the U.S. economy. The Purchasing Managers' Index (PMI) measured by Institute of Supply Management (ISM) touched 59.3% in November, indicating better economic activity in the manufacturing sector. This marks the 27th consecutive month of manufacturing growth. Also, November was the 106th straight month of growthin non-manufacturing activities, with the ISM-measured Non-Manufacturing Index (NMI) touching 60.7%.
  • Post the 2017 tax reform, corporate spending increased with U.S. companies pouring tax savings into growth initiatives. This, in turn, is spurring demand for business services. Although trade war tensions remained a concern for the industry, the temporary trade truce between the United States and China should be a breather.
  • Higher talent costs due to a competitive talent market and Trump’s stringent policies on immigration are hurting certain Business Services stocks. Further, service providers face regulatory hurdles and compliance-related issues due to operations across the globe.

Zacks Industry Rank Indicates Gloomy Prospects

The Zacks Business – Services industry is housed within the broader Zacks Business Services sector. It carries a Zacks Industry Rank #151, which places it in the bottom 42% 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 underperformance 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.

The sell-side analysts covering the companies in this industry have been steadily raising their estimates. Over the past year, the industry’s consensus earnings estimate for the current year has decreased 3.7%.

Despite the bleak prospects, we zero in on a few stocks that you may want to add to your portfolio. But before that, it’s worth taking a look at the industry’s performance and current valuation.

Industry Declines But Lesser Than S&P 500 and Sector

The Zacks Business-Services industry has declined over the past year but lesser than the Zacks S&P 500 composite and the broader Zacks Business Services sector. The industry has declined 0.8% compared with the S&P 500 composite’s 6.7% decline and the broader sector’s 1% fall.

One-Year Price Performance

Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings (P/E) ratio, which is commonly used for valuing business information services stocks, the industry is currently trading at 19.16 compared with the S&P 500’s 14.96 and the sector’s 19.05.

Over the past five years, the industry has traded as high as 23.52X, as low as 17.97X and at the median of 19.60X.

Forward 12-month P/E Ratio

Bottom Line

The Fed’s continuous efforts to withdraw support from the economy reflect nothing but its continued strength. The drivers in 2018 are expected to remain impactful in 2019 as well.

The business services industry should be in good shape driven by inherent economic stability. Strength in finance & insurance and e-commerce, developments in the digital services and positive contribution from a firm labor market should boost the industry.

Here are a few stocks that you may want to consider for your portfolio.

General Finance Corp. (GFN - Free Report) : This California-based rental services company sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

SPS Commerce, Inc. (SPSC - Free Report) : This Minnesota-based cloud-based supply chain management solutions provider carries a Zacks Rank #2 (Buy).

Interserve Plc : This UK-based advice, design, construction, equipment, facilities management, and citizen services company also carries a Zacks Rank #2.

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