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Business Services Stock Outlook - Aug. 2012

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To Begin With

In today’s world, companies strive to remain focused on functions and activities that are close to their core competence and where they enjoy competitive advantages. But they still need to perform a host of other functions in today’s complex market place. This need opens the door for providers of business services.

Business services can be defined as ancillary services provided by companies to other players in the market. It can also be called a tertiary sector. Hence, the main business of one company can be a business service for another company.

The business service sector is highly fragmented, with no single service provider boasting dominant market share to rule the industry. As per business reports, the top 50 companies of the sector contributes to less than 25% of the overall revenue of the business service sector.

The business services industry comprises a large number of businesses. The industry’s array of diverse services includes marketing, consulting, staffing, security, telecommunications, internet services, logistics, food and catering, and waste handling, among many others. In its expanded sense, the US business services sector generates consolidated yearly revenue of about $620 billion, though many companies mentioned below do not strictly fall into the generally accepted definition of the industry.

Some Industries in the Business Service Sector

Advertising & Market Services and Direct Marketing plays a vital role in informing consumers about new products, eventually helping the producers to better penetrate into the markets. The Interpublic Group of Companies, Inc. ([url=]IPG[/url]), Omnicom Group Inc. ([url=]OMC[/url]), Valassis Communications Inc. ([url=]VCI[/url]), Harte-Hanks Inc. ([url=]HHS[/url]) and Vertis are important players in this industry.

Consulting Service providers offer expert advice in a given field for smoother functioning of the companies. Major companies in this arena include Accenture plc ([url=]ACN[/url]), Bain, Booz Allen, Deloitte Consulting (an affiliate of Deloitte Touche Tohmatsu), and IBM Global Services ([url=]IBM[/url]).

The Staffing business helps companies identify and recruit the right person for the right job. This sector is dominated by Insperity Inc. ([url=]NSP[/url]), Kelly Services Inc. ([url=]KELYB[/url]), ManpowerGroup ([url=]MAN[/url]), ADP TotalSource, and the US operations of Adecco.

Internet Service Providers and Telecommunication Services act as a bridge to connect knowledge, information and personnel across the globe. This sector is ruled by AT&T Inc. ([url=]T[/url]), Verizon Communications Inc. ([url=]VZ[/url]) and Comcast ([url=]CMCSA[/url]).

Surveillance, Investigation & Security Consulting Services providers offer specialized security services and this sector is dominated by FTI Consulting ([url=]FCN[/url]) and Kroll.

ABM Industries Incorporated ([url=]ABM[/url]) and ServiceMaster are the leaders in Janitorial & Carpet Cleaning Services. This service helps to maintain cleanliness and hygine at workplace.

As the name suggests, Food Service Contractors provides food. Major components in this domain include ARAMARK, Centerplate and Delaware North.

Waste Management service providers offer services that includes collection, transport, processing, recycling, disposing and monitoring of waste. Waste Management Inc ([url=]WM[/url]), Republic Services Inc. ([url=]RSG[/url]) and Waste Connections Inc. ([url=]WCN[/url]) are the major players in this arena.

Travel Agencies & Service providers offer logistics and conveyance services. The sector leaders include Carlson Wagonlit Travel and Sabre Holdings.

The US and Europe are the largest markets for the business service sector. Some of the dominant players beyond the US boundary include: waste and remediation services provider Veolia Environnement ([url=]VE[/url]) (France), facilities support services provider Serco Group (UK), staffing services provider Adecco (Switzerland), travel agency service TUI Travel (UK), and security services provider G4S (UK). Other big names in the field are Rentokil Initial (UK); and ISS (Denmark).

Nevertheless, the emerging economies, such as India and China are also becoming important destinations for the business service sectors.


Labor Intensive: Given the nature of intangible products offered by the service sector, it is a labor intensive industry. Labor, both skilled and unskilled, is an essential part for a smooth functioning of this sector. Being a labor-intensive sector, it offers immense employment opportunities.

Cost Effective: All business operators prefer to minimize costs of operation and maximize margins. This sector offers cost effectiveness to the companies that opt for their services. Companies will have to incur higher costs if a company employs the services by themselves and does not take the help of the service providers.

The service providers specialize in particular services and reduce the operational cost of a company, eventually helping companies to limit overall costs. Notably, an increased number of companies opting for such specialized services would increase the volumes for the service providers. As a result, they can offer services at a lower cost, which in turn will further lower the cost for the companies.

Specialized Service: The industry offers specialized services that come with latest technologies. This is very evident for the security and consulting services. To safeguard data, companies are compelled to engage security service providers. The security service providers need to have the latest and most efficient technologies in place to persuade its clients and win business contracts.

Also, with increased number of mergers and acquisitions across the globe, the prospects for legal service providers look good. Consulting services is another wing of this industry that is gaining traction at a higher pace these days.

With complexities in business on the rise, companies are opting for expert advices before entering into any new venture rather than having hiccups once already into it. Hence this service sector also looks promising as their services are becoming an indispensable part for companies that are fighting to survive in the competitive market.


Growth Tied to Health of Economy: One of the major factors that could impact the growth of the service sector is the overall health of the economy. The companies in the business service sector derive revenue by providing essential services to other companies. Spending by companies to avail services might reduce drastically if the pace of economic growth is slower than the expected level. This would naturally reduce the business of the service providers and affect their fundamentals.

Training, Maintaining Skilled Workforce: Since skilled workers are always in high demand, there remains a possibility of high turnover rate within the sector. Training of unskilled workers or taking in new skilled workers increases operational costs, thereby affecting margins. This sector needs to have more skilled workforce to take advantages of the technology that is developing almost everyday.

Zacks Rank

Our proprietary stock-picking framework, the Zacks Rank, provides a reliable indicator of the likely movements of the Business Service Sector stocks. Among the companies mentioned, only AOL ([url=]AOL[/url]) holds a Zacks #2 Rank, which translates into a short-term Buy rating. The Zacks Rank captures the essence of earnings momentum or lack thereof by focusing on trends in earnings estimate revisions.

Valassis Communications, Accenture, Insperity, AT&T, Verizon, Waste Connections, Republic Services, ABM Industries and Veolia hold a Zacks #3 Rank, indicating a short-term Hold rating.

Interpublic, Omnicom, Waste Management, and Harte-Hanks holds Zacks #4 Rank, indicating a short-term Sell rating.  Manpower holds Zacks #5 Rank, translating into a short-term Strong Sell rating.

To Conclude

A dearth of skilled labor in the business service sectors can have an impact on the future growth possibilities. Non availability of quality workforce at a reasonable rate might increase the overall operational cost.

However, due to the highly fragmented nature of the industry, it is difficult to set a distinct trend or predict a concrete future of the industry. The industry is expected to grow at an annual compounded rate of 4% from 2010 to 2015.

With population growing at an accelerated pace and economic turmoil being a constant drag of late, generating employment is a burning issue. This sector, being labor intensive, involves lower capital investments and confidently addresses this problem. Thus, we can safely say this industry is essential to business operations going forward, despite the hurdles.

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