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Dreary Near-Term Outlook for Business Services Industry

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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.

Here are the industry’s three major themes:

  • The industry is benefiting from economic strength and stability, and higher government and personal spending. Both manufacturing and non-manufacturing activities remain healthy, keeping demand for business services in good shape. Purchasing Managers' Index (PMI) measured by Institute of Supply Management (ISM) touched 52.8% in April, indicating better economic activity in the manufacturing sector. This marked the 32nd consecutive month of manufacturing growth. The ISM-measured Non-Manufacturing Index (NMI) touched 55.5% in April, marking the 111th straight month of growth in non-manufacturing activities.
     
  • Since service firms have less foreign sales exposure compared to goods companies, the industry is less affected by trade war. Also, service firms incur lower foreign input costs that might be subject to tariffs. So, service stocks are safe as US-China trade war escalates.
     
  • 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 #165, which places it in the bottom 36% 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 decreasing their estimates. Over the past year, the industry’s consensus earnings estimate for the current year has decreased 8.4%.

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

Industry Outperforms S&P 500, Underperforms Sector

The Zacks Business-Services industry has outpaced the Zacks S&P 500 composite but lagged the broader Zacks Business Services sector over the past year.

The industry has rallied 7.8% over this period compared with the broader sector’s rise of 8.2% and the S&P 500 composite’s rally of 2.6%.

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-services stocks, the industry is currently trading at 14.55 compared with the S&P 500’s 16.45 and the sector’s 22.39.

Over the past five years, the industry has traded as high as 17.84X, as low as 10.36X and at the median of 15.47X, as the charts below show.

Price to Forward 12 Months P/E Ratio



Bottom Line

Robust manufacturing and non-manufacturing activities and higher government spending should support growth of the industry in the long run. However, shortage of skilled labor, higher talent costs and Trump’s strict rules on immigration are concerns currently.

Below, we have mentioned four stocks from the industry, which investors should add to their portfolio, as they carry a Zacks Rank #1 (Strong Buy) or a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank  stocks here.

SPS Commerce, Inc. (SPSC - Free Report) : The stock of this MN-based provider of cloud-based supply chain management solutions has gained 45.5% over the past year. The Zacks Consensus Estimate for current-year EPS has been revised 6.3% upward in the past 60 days. The stock carries a Zacks Rank #1.

Price and Consensus: SPSC



Core-Mark Holding Company, Inc. (CORE - Free Report) : The stock of this MN-based marketer of fresh and broad-line supply solutions has gained more than 100% over the past year. The Zacks Consensus Estimate for current-year EPS has been revised 6% upward in the past 60 days. The stock carries a Zacks Rank #2.

Price and Consensus: CORE



Vectrus, Inc. (VEC - Free Report) :This CO-based facility and logistics, information technology and network communication services company has gained 22.6% in the past year. The Zacks Consensus Estimate for current-year EPS has been revised 0.3% upward in the past 60 days. The stock carries a Zacks Rank #2.

Price and Consensus: VEC



Xerox Corporation (XRX - Free Report) : The stock of this CT-based provider of document management systems and solutions has gained 10.2% in the past year. The Zacks Consensus Estimate for current-year EPS has been revised 3.5% upward in the past 60 days. The stock carries a Zacks Rank #2.

Price and Consensus: XRX

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