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Costs & Compliance Issues Weigh on Business Services Industry
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The companies grouped under the Business Services category 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 mature with the demand environment currently in good shape. Revenues and cash flows have grown steadily over the past few years, enabling most industry players to pay out stable dividends. It is a major beneficiary of non-manufacturing activities, which grew for the 115th straight month in August.
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 bets 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 #192, which places it in the bottom 25% 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 39.6%.
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 Underperforms S&P 500 and Sector
The Zacks Business-Services industry has lagged the Zacks S&P 500 composite as well as the broader Zacks Business Services sector over the past year.
The industry has declined 12.9% over this period compared with the S&P 500 composite’s rally of 3.6% and the broader sector’s rise of 5.5%.
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 23.17 compared with the S&P 500’s 17.08 and the sector’s 23.72.
Over the past five years, the industry has traded as high as 32.73X, as low as 17.66X and at the median of 24.42X, as the charts below show.
Price to Forward 12 Months P/E Ratio
Bottom Line
Strength in 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.
SPS Commerce, Inc. (SPSC - Free Report) : The stock of this MN-based provider of cloud-based supply chain management solutions has gained 17.8% year to date. The Zacks Consensus Estimate for current-year EPS has been revised 2.7% upward in the past 60 days.
Price and Consensus: SPSC
Core-Mark Holding Company, Inc. : The stock of this MN-based marketer of fresh and broad-line supply solutions has gained 34.9% year to date. The Zacks Consensus Estimate for current-year EPS has been revised 1.9% upward in the past 60 days.
Price and Consensus: CORE
Viad Corp (VVI - Free Report) : The stock of this AZ-based experiential services company has gained 34.4% year to date. The Zacks Consensus Estimate for current-year EPS has remained unchanged in the past 60 days.
Price and Consensus: VVI
HeadHunter Group PLC (HHR - Free Report) : The stock of this Moscow-based operator of online recruitment platform has gained 27.7% year to date.The Zacks Consensus Estimate for current-year EPS has been revised 1.4% upward in the past 60 days.
Price and Consensus: HHR
Wall Street’s Next Amazon
Zacks EVP Kevin Matras believes this familiar stock has only just begun its climb to become one of the greatest investments of all time. It’s a once-in-a-generation opportunity to invest in pure genius.
Image: Bigstock
Costs & Compliance Issues Weigh on Business Services Industry
The companies grouped under the Business Services category 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:
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 #192, which places it in the bottom 25% 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 39.6%.
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 Underperforms S&P 500 and Sector
The Zacks Business-Services industry has lagged the Zacks S&P 500 composite as well as the broader Zacks Business Services sector over the past year.
The industry has declined 12.9% over this period compared with the S&P 500 composite’s rally of 3.6% and the broader sector’s rise of 5.5%.
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 23.17 compared with the S&P 500’s 17.08 and the sector’s 23.72.
Over the past five years, the industry has traded as high as 32.73X, as low as 17.66X and at the median of 24.42X, as the charts below show.
Price to Forward 12 Months P/E Ratio
Bottom Line
Strength in 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 #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
SPS Commerce, Inc. (SPSC - Free Report) : The stock of this MN-based provider of cloud-based supply chain management solutions has gained 17.8% year to date. The Zacks Consensus Estimate for current-year EPS has been revised 2.7% upward in the past 60 days.
Price and Consensus: SPSC
Core-Mark Holding Company, Inc. : The stock of this MN-based marketer of fresh and broad-line supply solutions has gained 34.9% year to date. The Zacks Consensus Estimate for current-year EPS has been revised 1.9% upward in the past 60 days.
Price and Consensus: CORE
Viad Corp (VVI - Free Report) : The stock of this AZ-based experiential services company has gained 34.4% year to date. The Zacks Consensus Estimate for current-year EPS has remained unchanged in the past 60 days.
Price and Consensus: VVI
HeadHunter Group PLC (HHR - Free Report) : The stock of this Moscow-based operator of online recruitment platform has gained 27.7% year to date.The Zacks Consensus Estimate for current-year EPS has been revised 1.4% upward in the past 60 days.
Price and Consensus: HHR
Wall Street’s Next Amazon
Zacks EVP Kevin Matras believes this familiar stock has only just begun its climb to become one of the greatest investments of all time. It’s a once-in-a-generation opportunity to invest in pure genius.
Click for details >>