The Zacks Business Services sectoris one of the 12 Zacks sectors expected to register double-digit earnings growth in the second-quarter reporting cycle. Per the latest Earnings Outlook, earnings and revenues from this sector are anticipated to increase 22.7% and 6.7%, respectively on a year-over-year basis.
As of Aug 1, 79.3% of S&P 500 members from the sector reported their quarterly numbers. Total earnings of these companies increased 23.9% from the same period last year on 6.9% higher revenues, with 73.9% beating EPS estimates and 69.6% beating revenue estimates.
A Healthy Economy Driving Business Services
The business services sector is gaining strength as it is firmly tied to the health of the broader economy, which is currently quite favorable. U.S. GDP grew 4.1% in the second quarter, almost doubling from 2.2% increase witnessed in the first quarter, recording the strongest performance in four years. Higher wage growth, a tightening labor market, and a low unemployment rate, all indicate a bullish economy.
With unemployment at an 18-year low of 4%, job additions were well above the 200,000 mark in June. Professional and business services was at the forefront and added 50,000 jobs.
U.S. workers saw the highest growth in wages and benefits since September 2008, according to a report released by the Labor Department on Jul 31. The Employment Cost Index (ECI), a measure of labor cost, increased 0.6% in the second quarter. The cost of wages and benefits rose 2.8% on a year-over-year basis, the highest in almost a decade. Wages alone gained 2.8%, which too hit a 10-year high.
A Favorable Post-Tax Reform Scenario
Following the tax reform, U.S. companies are pouring tax savings into growth initiatives. This is aiding both manufacturing and non-manufacturing activities, thereby spurring demand for business services.
Economic activity in the manufacturing sector expanded in July as Purchasing Managers' Index (PMI), measured by Institute of Supply Management (ISM), touched 58.1%. This shows strong growth in manufacturing for the 23rd consecutive month, driven by continued increase in new orders, production and employment.
The ISM non-manufacturing index (NMI) was 59.1% in June, recording the 101th consecutive month of expansion. The expansion was driven by continued increase in business activity, new orders and new export orders. July NMI number will be released on Aug 3.
Sector Showing Resilience to Trade War
As tensions over trade policy intensify, the business services sector stands to gain from the growing U.S. economy and Trump’s business friendly moves.
The sector has performed well compared with the benchmark index year to date. It has gained 9.7%, which compares favorably with the Zacks S&P 500 Composite’s rally of 5.6% in the said time frame.
So, adding companies from the sector looks like a smart move to safeguard your portfolio amid trade war fears, especially if they have the potential to report better-than-expected earnings this time around.
Given the high degree of diversity in the sector, picking the right stocks for your portfolio might appear to be a colossal task. An easy way to narrow down the list is by choosing stocks that have a favorable Zacks Rank #1 (Strong Buy) or 2 (Buy) or 3 (Hold) and a positive Earnings ESP. This can be done with the help of the Zacks Stock Screener.
Earnings ESP is our proprietary methodology for determining the stocks that have the best chances to surprise with their next earnings announcement. Earnings ESP shows the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%. Here are four business services stocks that match the abovementioned criteria and thus may emerge winners in the second-quarter reporting cycle.
Purchase intelligence platform operator Cardlytics, Inc. (CDLX - Free Report) currently carries a Zacks Rank #3 and has an Earnings ESP of +26.12%. The company is slated to report results after the bell on Aug 14.
Debit and credit card processing, payroll, human capital management (HCM) and card services provider, JetPay Corporation has an Earnings ESP of +14.29% and Zacks Rank #3. The company is expected to report results on Aug 10.
Electronic payment processing services provider Worldpay, Inc. (WP - Free Report) is also a Zacks Rank #3 stock. With an Earnings ESP of +0.49%, the company is likely to beat earnings estimates. Worldpay is slated to report results on Aug 9 before market open.
Provider of colocation space and related services Switch, Inc. (SWCH - Free Report) has a Zacks Rank #3 and an Earnings ESP of +9.38%. The company will report results on Aug 13 after market close.
You can see the complete list of today’s Zacks #1 Rank stocks here.
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