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Industry Outlook

The business services sector provides ancillary services to the other players in the market. Hence, the core business of one company in this sector can be a business service for another. Importantly, this dynamism opens the door to many business services companies.

The intensely competitive business services sector must rigorously work toward controlling costs and generating higher revenues so that its profitability does not suffer. A focus on functions and activities close to its core competence is a prerequisite in reaping the benefits of economies of scale, besides improving competitive positioning.

Notably, business service occupies a handsome share in a country’s gross domestic product (GDP) with the gradual shift in the global economy from agriculture to industry to now business services. The sector therefore plays a major role in a country’s overall development.

The fortunes of business service operators are closely tied to the health of the broader economy. As per the U.S. Bureau of Economic Analysis (BEA), domestic economy expanded at a rate of 0.8% in the first quarter of 2016, which benefited from higher contribution from personal consumption expenditures and increased residential fixed investment. The growth momentum is now expected to accelerate by 1.7% in 2016 and 3.0% in 2017.

This improving outlook for the U.S. economy is therefore a net positive for the sector. Though the bureau presently estimates total industrial production to decline 0.9% in 2016, the same is expected to be on the growth trajectory in 2017, with an estimated increase of 3.5%, thus offering opportunities of growth and expansion to business service providers. Moreover, a projected rise in expenditure should lend support to the business service sector.

Economic sensitivity aside, business service companies are quite conservatively managed, with a large number of players sharing their excess cash with shareholders through dividends and share buybacks.

Nonetheless, the business service sector is highly fragmented, with no single service provider enjoying market dominance. As per business reports, the top 50 companies of the sector contribute less than 25% to the overall revenue. However, given its unique nature, Zacks has classified the group as one of the 16 sectors (the S&P’s official GIC classification has only 10 sectors where business services are grouped within the ‘Industrials’ sector). Notably, with about 3.4% of total market capitalization, the sector is estimated to have 2.8% share of income in 2016.

Stand-Alone Zacks Sector

This industry covers an array of services that include marketing, consulting, staffing, security, telecommunications, Internet services, logistics and waste handling. In its expanded sense, the U.S. business services sector generates consolidated yearly revenues of about $620 billion, though many companies mentioned below do not strictly fall within the generally accepted definition of the industry.

Within the Zacks Industry classification, we have divided the business world into 16 sectors comprising 60 industries (at the medium or M-level) and 256 industries at the expanded or X-level. We rank all 256 X-level industries in the 16 sectors based on the earnings outlook of the constituent companies in each industry. This ranking is available in the Zacks Industry Rank page.

The way to align the ranking and outlook from the complete list of Zacks Industry Rank for the 257+ industries is by dividing it into positive, neutral and negative categories depending on the Zacks Rank. The outlook for the top one-third of the list (Rank of #88 and lower) is positive, the middle one-third of the list (Rank of #89 to #176) is neutral while that for the bottom one-third (Rank #177 and higher) is a clear negative.

Please note that the Zacks Rank for stocks – the core of our Industry Rank – has an impressive track record, verified by outside auditors, to foretell stock prices, in particular over the short term (one to three months). We have seven X-level industries within the Business Services sector: Auction/Valuation Services, Business Information Services, Business Services, Consulting, Financial Transaction Services, Outsourcing, Staffing and Waste Removal Services.

Auction/Valuation Service ranked #10, Consulting ranked #14 and Financial Transaction Services with #59 rank are industries that fall in the upper 1/3 and have a positive outlook.

Business Information Services with rank #95, Business Services at #103, Waste Removal at #110, Outsourcing at #161 and Staffing at rank #176 are positioned in the mid 1/3 of all Zacks industries and have a neutral outlook

This allocation clearly points to a positive to neutral outlook for the sector. Notably, none of the industry fall in the bottom one-third tier of our ranking.

Our top picks from the Consulting industry are FTI Consulting, Inc. (FCN - Analyst Report) and Gartner Inc. (IT - Snapshot Report) . We favor Total System Services, Inc. (TSS - Analyst Report) from the Financial Transaction Services industry. Copart, Inc. (CPRT - Analyst Report) and Ritchie Bros. Auctioneers Inc. (RBA - Snapshot Report) are our top picks from Auction/Valuation Service industry. Each of them sports Zacks Rank #1 (Strong Buy).

Earnings Review & Outlook

The earnings picture for the business service sector in the first quarter of 2016 was better than the S&P 500.

Earnings witnessed 6.6% growth on 5.3% revenue improvement. The figures compare favorably with the numbers delivered by the S&P 500 (6.4% earnings decline on revenue decline of 0.8%).

With the companies gearing up for their second-quarter earnings results, let’s find out what’s in store for the business service sector.

Earnings for the to be reported quarter are estimated to decline 0.2% for the sector and 5.9% for the S&P. Revenues on the other hand are expected to exhibited growth of 7% versus a decline of 0.7% for the S&P.

The graph below shows year-over-year bottom-line growth of the business service (BS) sector in comparison to the S&P 500.

The graph below shows year-over-year top-line growth of the BS sector in comparison to the S&P 500.