To Begin With
Business services or the tertiary sector can be defined as
ancillary services provided by companies to other players in the
market. Hence, the core business of one company can be a business
service for another.
The tertiary sector is being increasingly depended on by firms for
services that are not their core competence. Operating efficiencies
demand that companies focus on functions and activities that are
close to their core competence. This not only helps them reap the
benefits of scale economies in those core functions, but also helps
improve their competitive positioning.
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 of this sector. However, given its
unique nature, Zacks has classified the group as one of 16 sectors
(the S&P's official GIC classification has only 10 sectors
where business services are grouped within the 'Industrials'
Stand-Alone Zacks Sector - Zacks Industry Rank
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 revenue
of about $620 billion, though many companies mentioned below do not
strictly fall within the generally accepted definition of the
Within the Zacks Industry classification, we have divided the
business world into 16 Sectors that are comprised of 60 Industries
(at the medium or M-level) and 260+ industries at the expanded or
X-level. We rank all 260+ X-level industries in the 16 sectors
based on the earnings outlook for 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 260+ industries is that the outlook for
the top one-third of the list (Zacks Industry Rank of #88 and
lower) is positive, while the outlook for the bottom one-third
(Zacks Industry Rank #177 and higher) is negative.
Please note that the Zacks Rank for stocks, which is at 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 (1 to 3 months). We have 7 X-level industries within the
Business Services sector; namely Auction/Valuation Services,
Business Information Services, Business Services, Consulting,
Financial Transaction Services, Outsourcing, Staffing, and Waste
Staffing at Zacks Industry Rank #44 and Business Services at #74
are the only industries in the sector currently ranked in the top
1/3rd of all Zacks industries and have a positive outlook. On the
negative side, Waste Removal at #179 and Auction/Valuation at #253
are clearly in the bottom 1/3rd of all industries and have a
negative outlook, but Outsourcing and Business Information Services
are also closer to the bottom 1/3rd. The Financial Transaction
Services industry at #115 and the Consulting industry #99 are the
only industries in the middle 1/3rd of all industries and have
clearly neutral outlook.
Of the 19 companies in the Consulting industry, 5 have Zacks Rank
#2 (Buy), while only 2 have Zacks Rank #4 (Sell) or Zacks Rank #5
(Strong Sell), implying that most of the companies carry a Zacks
Rank #3 (Hold). Companies like
Huron Consulting Group Inc.
Information Services Group, Inc.
) have a Zacks Rank #2 while
) are Zacks Ranked #3.
The Financial Transaction Services industry, with players like
), is currently at #67, or in the top 1/3 block.
Industries in the Business Service Sector
Advertising & Market Services and Direct Marketing, not part of
the Business Services sector, play a vital role in informing
consumers about new products, eventually helping the producers to
better penetrate the markets.
The Interpublic Group of Companies, Inc.
Omnicom Group Inc.
Valassis Communications Inc.
) and Vertis are important players in this sector.
Consulting Service providers offer expert advice in a given field
for smoother functioning of the companies. Major companies in this
), Bain, Booz Allen, Deloitte Consulting (an affiliate of Deloitte
Touche Tohmatsu) and
IBM Global Services
The Staffing business helps companies identify and recruit the
right person for the right job. This sector is dominated by
Kelly Services Inc.
), ADP TotalSource and the U.S. operations of Adecco.
Internet Service Providers and Telecommunication Services connect
knowledge, information and personnel across the globe. This sector
is ruled by
Verizon Communications Inc.
Surveillance, Investigation & Security Consulting Services
providers offer specialized security services. This sector is
) and Kroll.
Waste Management service providers offer services such as
collection, transport, processing, recycling, disposing and
monitoring of waste.
Waste Management Inc.
Republic Services Inc.
Waste Connections Inc.
) are the major players in this arena.
The U.S. and Europe are the largest markets for the business
service sector. Some of the dominant players beyond the U.S.
boundary include waste and remediation services provider
) (France), facilities support services provider Serco Group
(U.K.), staffing services provider Adecco (Switzerland), travel
agency service provider TUI Travel (U.K.), and security services
provider G4S (U.K.). Other big names in the field are Rentokil
Initial (U.K.) and ISS (Denmark).
The emerging economies such as India and China are also becoming
important destinations for the business service sectors.
With companies starting to release their second quarter financial
reports, let's take a look at how things are shaping up for the
Earnings for the business sector have grown 9.7% in first quarter
faring better than the S&P Group's earnings growth of 2.4%.
Earnings were also better than 8.6% growth achieved in the last
quarter of 2012.
Revenues showed an improvement of 2.8% faring much better than the
S&P 500's year-over-year average of negative 1.1%. Revenue
growth also improved sequentially.
In terms of surprises, the sector's performance was weaker than the
broader market, with only 52.6% of Business Services companies
beating earnings expectations, compared to the 'beat ratio' of
65.2% for the S&P 500.
Looking ahead at the second quarter results, earnings are expected
to improve 9.7% compared to a minimal improvement of 1% for the
broader market. Revenue growth is expected to be 1.6% for the
sector but decline 0.8% for the S&P 500.
For a detailed look at the earnings outlook for the Business
Services and other sectors, please check our weekly
Zacks Earnings Trends report
Consolidations in Q2
Mergers and acquisitions play an important part in not only
strengthening a company's foothold by grabbing more market share
but also edging out competition.
Healthcare Services Group, Inc.
), provider of housekeeping, laundry, linen, facility maintenance
and dietary services to nursing homes, retirement complexes,
rehabilitation centers and hospitals in the United States, entered
into a deal with Platinum Health Services, LLC to purchase all of
its operating assets.
) is busy making acquisitions. This provider of automated consumer
financial services, purchased the assets of Rohnert Park, CA-based
Merrimak ATM Group, LLC in June. In May it purchased the assets of
Portland, OR-based Aptus Financial.
Global vehicle rental giant
Avis Budget Group, Inc.
) acquired Payless Car Rental, the sixth largest car rental
) provider of specialized technical services has also entered into
a deal to buy the Gulf coast operations of
). These are ENGlobal Corp.'s professional service assets.
Given the nature of intangible products offered by the service
sector, it is labor intensive. The sector offers immense employment
opportunities as it requires both skilled and unskilled labor for
its smooth functioning. Business reports indicate that the two most
populated countries, China and India, are together expected to
create 300 million employment opportunities in the global job
market by 2030.
Companies can reach their consumers or prospective buyers across
the world when Advertising & Market Services and Direct
Marketers act on behalf of these in informing consumers about new
products or added features in existing products. Thus, these
service providers help in widening a company's customer base and/or
maintaining a better retention ratio. It also opens the door to
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 which would otherwise be far
With specialized services, these providers reduce the operational
cost and in turn the overall costs of companies. Notably, an
increased number of companies opting for such specialized services
would increase volumes for the service providers. This would
eventually lead to services at lower costs and further reduction in
costs for companies.
The industry offers specialized services based on the latest
technologies. This is evident for the security and consulting
services. To safeguard data, companies are compelled to engage
security service providers, which are required to have the latest
and most efficient technologies in place to persuade their clients
and win business contracts.
Also, with the increased number of mergers and acquisitions across
the globe, the prospects for legal service providers look good.
Consulting service is another wing of this industry that is fast
With business complexities on the rise, companies are opting for
expert advice before entering into any new venture rather than
risking losses due to trial and error. Hence, this service sector
also looks promising as it is indispensable for companies that are
fighting to survive in a 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 generate revenues 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.
Requires Continuous Spending for Research and Development:
Importantly, consulting service providers need to remain abreast
with the latest technologies through continuous spending on
research and development. The performance of these providers can be
hampered if they do not acclimatize and/or widen its services with
Training, Maintaining Skilled Workforce:
Since skilled workers are always in demand, there remains a
possibility of a high turnover rate within the sector. The 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 advantage of the technology
that develops at a relatively rapid pace.
Maintaining or increasing market share remains a challenge for
business service providers. As discussed earlier, the main business
of one company can be a business service for another; hence target
customers for both may be the same at times.
Therefore, a business service provider is always required to be
adequately equipped to win over customer demand. While larger
providers bank on the broader variety of their service offerings
and can effectively take up difficult ventures, the relatively
smaller players compete in the industry backed by their specialized
The dearth of skilled labor in the business services sector can
have an impact on future growth possibilities. Non-availability of
quality workforce at a reasonable rate might increase overall
However, due to the highly fragmented nature of the industry, it is
difficult to set a distinct trend or predict a concrete future for
the industry. The expected annual compounded growth rate for this
sector is 4% from 2010 to 2015.
The sector might also attract new investors' attention as nearly
one-third of the companies under our coverage in the business
service industry share profits with their shareholders via dividend
payments. Dividend payments help in retaining stockholders
confidence in the company. Dividend yield ranges from 1.16% at
Core-Mark Holding Company, Inc.
) to 6.35% at
SouFun Holdings Ltd.
). Notably, every company's dividend yield betters the industry
With population growing at an accelerated pace and economic turmoil
being a constant drag, 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 that despite all the hurdles, this industry is crucial
for business operations going forward.
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AOL INC (AOL): Free Stock Analysis Report
AVIS BUDGET GRP (CAR): Free Stock Analysis
CARDTRONICS INC (CATM): Free Stock Analysis
CORELOGIC INC (CLGX): Free Stock Analysis
COMCAST CORP A (CMCSA): Free Stock Analysis
CORE-MARK HLDG (CORE): Free Stock Analysis
ENGLOBAL CORP (ENG): Get Free Report
FURMANITE CORP (FRM): Free Stock Analysis
HEALTHCARE SERV (HCSG): Free Stock Analysis
HARTE-HANKS INC (HHS): Free Stock Analysis
HURON CONSLT GP (HURN): Free Stock Analysis
INTL BUS MACH (IBM): Free Stock Analysis Report
INFORMATION SVC (III): Free Stock Analysis
INTERPUBLIC GRP (IPG): Free Stock Analysis
KELLY SVCS B (KELYB): Get Free Report
MASTERCARD INC (MA): Free Stock Analysis Report
MANPOWER INC WI (MAN): Free Stock Analysis
INSPERITY INC (NSP): Free Stock Analysis Report
OMNICOM GRP (OMC): Free Stock Analysis Report
REPUBLIC SVCS (RSG): Free Stock Analysis Report
SOUFUN HLDG-ADR (SFUN): Free Stock Analysis
AT&T INC (T): Free Stock Analysis Report
VISA INC-A (V): Free Stock Analysis Report
VALASSIS COMMS (VCI): Free Stock Analysis
VEOLIA ENVIRON (VE): Get Free Report
VERIZON COMM (VZ): Free Stock Analysis Report
WASTE CONNCTION (WCN): Free Stock Analysis
WASTE MGMT-NEW (WM): Free Stock Analysis Report
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