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Business Services Industry Boasts Solid Near-Term Prospects

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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 and revenues, income and cash flows have grown steadily over the past few years.
  • It is currently on a strong footing driven by economic strength and stability that have kept service activities in good shape. Notably, U.S. GDP grew at an annualized rate of 2.1% in third-quarter 2019 compared with 2% growth in the second quarter, per estimates released by the Bureau of Economic Analysis. The Conference Board expects GDP growth of 2.2% for the fourth quarter and 2.3% for 2019. Further, December was the 119th month of consecutive growth in non-manufacturing activities with ISM-measured Non-Manufacturing Index touching 55%.
  • 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 Rosy Prospects

The Zacks Business-Services industry is housed within the broader Zacks Business Services sector. It carries a Zacks Industry Rank #85, which places it in the top 33% 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 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 Outperforms S&P 500, Lags Sector

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

The industry has rallied 26.4% over this period compared with the S&P 500 composite’s rally of 20.1% and the broader sector’s rise of 26.5%.

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 26.03 compared with the S&P 500’s 18.8 and the sector’s 25.82.

Over the past five years, the industry has traded as high as 26.03X, as low as 18.88X and at the median of 20.66X, 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 these carry a Zacks Rank #1 (Strong Buy) or #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Brookfield Business Partners L.P. BBU: The equity firm sports a Zacks Rank #1. The Zacks Consensus Estimate for 2019 EPS has increased 6% in the past 60 days.

Everi Holdings Inc. (EVRI - Free Report) : The technology solutions provider also sports a Zacks Rank #1. The Zacks Consensus Estimate for 2019 EPS has increased 2.9% in the past 60 days.

PFSweb, Inc. PFSW: This omni-channel commerce solutions provider carries a Zacks Rank #2. The Zacks Consensus Estimate for 2019 EPS has remained unchanged in the past 60 days.

WNS (Holdings) Limited WNS: This business process management company also carries a Zacks Rank #2. The Zacks Consensus Estimate for fiscal 2020 EPS has increased 3% in the past 60 days.

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