To Begin With
Business services sector is comprised of companies that provide
ancillary services to other players in the market. Hence, the core
business of one company can be a business service for another.
Operating efficiencies demand companies to focus on functions and
activities that are close to their core competence. This not only
helps them to reap the benefits of economies of scale in those core
functions, but also improves their competitive positioning.
Importantly, this dynamic opens the door to business services
companies to provide those services.
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
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' sector). The
Business Services sector accounts for 3.1% of the S&P 500
index's total market capitalization and is expected to bring in
roughly 2.4% of the index's total earnings this year.
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 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 comprising 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 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, while the outlook for the bottom one-third
(Rank #177 and higher) is negative. The outlook of the middle
one-third of the list (Rank of #89 to #176) is therefore neutral.
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
Waste Removal as well as Financial Transaction Services at Zacks
Industry Rank #37 and Staffing #64 fall in the upper 1/3 of all
Zacks industries and have a positive outlook. Outsourcing and
Business Information Services at #111 and Business Services at #170
are positioned in the mid 1/3 of all Zacks industries and have a
neutral outlook. Consulting at #191 falls to the bottom 1/3 with a
clear negative outlook. This distribution of industry ranks within
the sector shows that the overall bias is neutral to negative.
Earnings for the business sector grew 9.7% in the first quarter,
faring better than the overall 1.3% growth for the S&P 500. The
earnings growth pace moved north compared with 8.8% growth in the
previous quarter. Revenues showed an improvement of 5.0%, faring
much better than the S&P 500's year-over-year average of 2.7%.
Revenue growth also improved sequentially.
About 9.1% of the companies have already reported their second
quarter earnings. Earnings improved 7.2%, lagging the overall 11.1%
growth for the S&P 500. Revenues improved 14.0%, faring better
than the S&P 500's year-over-year average of 6.6%.
With majority of the companies yet to report, the sector is
expected to put up double-digit growth rates in second quarter.
Earnings are expected to grow 10.4% on revenue growth of 7.9%.
In terms of surprises, till now the sector's performance is softer
than the broader market, with 50% of Business Services companies
beating earnings expectations compared with the 'beat ratio' of
56.5% for the S&P 500.
Looking ahead, 2014 and 2015 earnings are expected to improve 12.7%
and 13.3% respectively. This compares favorably with 7.2% and 11.7%
for the broader market. Revenue growth is expected at 5.0% for 2014
and 6.3% for 2015 for the sector compared with a minimal
improvement of 0.8% and 3.8% for the respective years for the
For a detailed look at the earnings outlook for the Business
Services and other sectors, please check our weekly Earnings Trends
Stocks for Building Your Portfolio
Considering Zacks Rank, share prices, earnings surprise history and
future growth prospects, we think the following two stocks are
worth taking a close look.
Avis Budget Group, Inc.
): This provider of vehicle rental services through a network of
car and truck rental locations in the U.S., Canada, Australia, New
Zealand, Latin America, the Caribbean, and parts of Asia, delivered
positive earnings in the last four quarters in with an average beat
of almost 30.79%. The stock gained about 53% year to date, hitting
its 52-week high of $61.95 on Jul 3.
With initiatives such as changing business mix and focus on
accelerating profitable unit- bearing fruit, both volume and price
continue to witness an uptrend. Its inorganic story looks
impressive with several acquisitions. The company also remains
focused on controlling costs. Its share buyback program is on track
and continues to aid its bottom line, thereby enhancing
Our model projects earnings growth of about 26.5% for Avis Budget
over the long term.
ExamWorks Group, Inc.
): This provider of independent medical examinations (IMEs), peer
and bill reviews, Medicare compliance, and other related services
delivered positive earnings in the last four quarters in with an
average beat of almost 40.72%. Share prices also gained about 21%
year to date. Given the prospect of the company, we find more
potential left. Our model projects earnings to grow about 20% over
the long term.
The company continues to benefit from superior organic growth,
technology solutions that drive operating leverage and expanding
margins, and considerable cash flow. Its compelling inorganic
growth story is also expected to boost the performance level.
Both Avis Budget and ExamWorks sport a Zacks Rank #1 (Strong Buy).
What Keeps Business Service Rolling
The most important feature of this industry is that it is labor
intensive - creating employment - given the nature of intangible
products offered by the service sector. 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. According to International Monetary
Fund, unemployment rate in the U.S. is expected to decline going
forward - from 6.7% in 2013 to 6.2% in 2014 and 5.9% in 2015.
The industry offers specialized services based on the latest
technologies. With specialized services, these providers reduce the
operational cost and in turn the overall cost of companies, thereby
benefiting margins. Notably, an increased number of companies
opting for such specialized services would expand volumes for
service providers. This would eventually lead to services at lower
costs and a further reduction in costs for companies.
The industry offers global reach, helping the company widen its
customer base and maintain a better retention ratio. It also opens
the door to international trade.
Though the first quarter witnessed a slowdown, the International
Monetary Fund estimates that U.S. GDP growth will improve to 2% in
2014 and accelerate to 3% in 2015 from 1.9% in 2013. This opens
more opportunities for the service sector.
A major challenge faced by this industry is spending by companies
to avail of services from business service providers. This, in
turn, is directly tied to the health of the economy.
As this industry provides specialized services, it involves
continuous spending on research and development as well as
training, maintaining skilled workforce. While continuous research
and development help it acclimatize or adapt to new services to
account for the ongoing development, training and maintaining
skilled workforce limit high turnover rate.
Increasing competition also threatens this industry. As the main
business of one company can be a business service for another,
maintaining or increasing market share can pose risks to business
Mergers and acquisitions play a key role in not only strengthening
a company's foothold by grabbing more market share but also in
edging out competition. The business service space has seen a
flurry of acquisitions so far this year.
In February, Avis Budget Group closed the $30 million tuck-in
acquisition of Budget Licensee in Edmonton. The takeover has
expanded the company's international reach and helped it to tap
opportunities in the oil and gas industry.
ExamWorks made three acquisitions in the first half - Ability
Services Network, Inc. and its subsidiary MedAllocators, Inc. in
June, Solomon Associates, Inc. in May and Gould & Lamb in
February. While Ability Services Network will offer economies of
scale in the highly fragmented Medicare compliance market, Solomon
Associates will widen its footprint in Pennsylvania.
Corporate Resource Services, Inc.
), a diversified technology, staffing, recruiting and consulting
services firm, acquired Nationwide Screening Services in March
following the Alar Staffing and Staff Management Group buyouts in
Global education leader
Houghton Mifflin Harcourt
) made a couple of buyouts in May. One was an online,
personalized learning environment entitled Curiosityville and the
other was Channel One News, which helped it to expand digital
content offering and production capabilities.
), the leading provider of patent risk management solutions,
acquired PatentFreedom, the first provider of data, intelligence
and consulting on non-practicing entities (NPEs) in June.
) acquired West Glacier Motel & Cabins, the Apgar Village Lodge
and its related land, food and beverage services and retail
A dearth of skilled labor in the business services sector can
impact future growth possibilities. Non-availability of quality
workforce at a reasonable rate might increase overall operational
However, due to the highly fragmented nature of the industry, it is
difficult to set a distinct trend or predict a concrete future for
it. The expected annual compounded growth rate for this sector is
4% from 2010 to 2015.
The sector might also attract new investors as nearly one-third of
the companies under our coverage in the business service industry
shares profits with their shareholders via dividend payments.
Notably, dividend payments help in retaining stockholders'
confidence in a company. Also, companies undertake share
repurchases to enhance shareholders value.
With an ever-increasing population 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. Emerging economies such as
India and China are also becoming important destinations for the
business service sectors. On the flip side, these economies pose
challenges to employment growth in developed economies.
Nevertheless, we can safely say that despite all the hurdles, this
industry is crucial for business operations.
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