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Industry Outlook

Zacks Equity Research

Business Services Suffer High Costs, Stiff Competition


Trades from $3

Despite having its hands full of positives, the Business Services sector is nevertheless faced with a number of headwinds that tend to partially offset the positive impact of the catalysts mentioned in Business Services Well Poised to Create Employment." The recent slowdown in the U.S. jobs market and heightened uncertainty about the U.K. and European economies following the Brexit surprise are some of the other clouds on the horizon for this sector.

Discussed below are some inherent challenges faced by the business service sector:

Continuous Spending on Research and Development: Importantly, consulting service providers need to stay abreast of the latest technologies through continuous spending on research and development. The performance of these providers can be hampered if they do not acclimatize to or adopt new services to cope with the latest developments.

Maintaining Skilled Workforce Involves High Costs: Since skilled workers are always in demand, there is a possibility of a high turnover rate in the sector. The training of unskilled workers or taking in new skilled workers increases operational costs, and thus affects margins. This space needs to have a more skilled workforce to take advantage of technology that develops at a rapid pace.

Competition: Maintaining or increasing market share remains challenging for business service providers. As discussed earlier, the main business of one company can be a business service for another. So target customers for both may at times be the same.

Therefore, a business service provider is always required to be adequately equipped to win over customer demand. While larger providers bank on the broad variety of service offerings and can effectively take up difficult ventures, the relatively smaller players compete in an industry backed by specialized services.

Regulatory Hurdles: By virtue of having operations across the globe, service providers face regulatory hurdles and compliance-related issues. Western Union (WU - Analyst Report) incurred compliance expense of about 3.6% of revenues in 2015 and expects the same to be about 3.5% to 4% in 2016.

Moneygram International Inc. (MGI - Analyst Report) is being probed by a federal grand jury in relation to its consumer anti-fraud and anti-money laundering program matters for the period during 2003 to early 2009, among many other government investigations and litigations. Any reverse results from the investigation indicate a potential liability against damages, which could put pressure on margins and cash flows.

Based on unfavorable Zacks Rank and negative earnings trend over the last four quarters, we prefer to avoid SouFun Holdings Ltd (SFUN - Snapshot Report) and Everi Holdings Inc. (EVRI - Snapshot Report) . Each of these stocks carries a Zacks Rank #5 (Strong Sell) and has four quarters of average negative surprise. Also, these stocks witnessed negative estimate revisions over the last few weeks.

To Conclude

The dearth of skilled labor in the business services sector can affect its prospects. Non-availability of quality workforce at a reasonable rate might increase overall operational costs.

In addition, due to the highly fragmented nature of the industry, it is difficult to set a distinct trend or predict a concrete future for it.