3 Business Services Stocks Likely to Excel in Q3 Earnings

Buoyed by higher consumer spending, the U.S. GDP revved up to a 3.9% seasonally adjusted annual growth rate in the second quarter after a paltry 0.6% in the first quarter. This equated to a 2.3% growth rate for the first half of the year, marginally higher year over year.

Mirroring the performance of 2014, the U.S. economy had a roller-coaster ride with an unenterprising start to 2015 followed by an unexpected surge. Reminiscent of the performance in 2014, the odds are currently staked pretty high for a similar glide in the second half of 2015 as seen last year. Experts anticipate third-quarter and fourth-quarter 2015 GDP to grow in the vicinity of 2.0% and 2.6%, respectively.

On the surface, it appears that the economy failed to receive any 'slingshot' momentum from strong second quarter growth, primarily due to the fallout of the growing global malaise on domestic activity. Strong dollar appreciation and prevailing macroeconomic turmoil continue to adversely affect exports and corporate investment levels.

Solid appreciation of the dollar has dented the export basket, as the U.S. goods and services have been rendered expensive upon foreign soil. Lower oil prices have further added to the woes of the industries that directly or indirectly source businesses from the energy sector. While the first-half 2015 exports declined 1%, imports increased 5% on a year-over-year basis, leading to a high negative balance of trade.

The Negative Feelers

Non-defense capital goods orders (excluding aircraft), one of the closely watched parameters for business spending plans, contracted 0.3% in September - the largest decline of this kind since November 2009. Inflationary pressures remained muted and cast enough doubt whether the Fed will actually raise interest rate from the near zero levels in the latter half of the year.

The Markit Composite Purchasing Managers Index (PMI) data declined to 54.5 in October from 55.0 in September - the weakest expansion of the private sector output since the beginning of the year. This represents a general slowdown in new business growth and a cautious spending pattern by clients. Consequently, there was a slight reduction in backlogs of work across the service economy. This in turn led to softer employment growth within the service sector owing to reduced pressure on operating capacity.

The U.S. job market is also feeling the heat with only 136,000 and 142,000 job additions in August and September respectively, although the unemployment rate declined to 5.1% as less people are seeking active employment at present.

With a high positive correlation with the economy, the U.S. Industrials sector is likely to be adversely affected by the turn of events. As the companies take stock of the situation and deliberate on their future course of action, let us take a glimpse into how the third-quarter earnings season is shaping up so far.

Business Services Sector Performance

About 39.1% of the total S&P 500 companies in the Business Services sector have reported their earnings results till Oct 23, 2015. With a 'beat ratio' of 77.8%, total earnings for these companies are up 6.9% year over year. Revenues increased 2.8% compared with the year-ago period, with a 'beat ratio' of 66.7%. The entire Business Services sector is expected to perform relatively better than the overall equity market with an earnings growth expectation of 1.0% in the third quarter versus -3.4% for the S&P 500 index. (Read: Q3 Earnings Weak, Despite Tech Strength )

The primary growth drivers in this highly fragmented industry hinge on a healthy economy with decent prospects for job growth, higher disposable income and new business initiatives. An ideal mix of services, effective marketing strategies and ability to retain and attract new customers make the perfect recipe for profitability for most of these companies.

Given the lacklustre forecast, it might be a good idea to zero-in on a handful of Business Services stocks that are poised to beat earnings estimates this quarter. An earnings surprise should help these stocks outperform in the near term.

How to Pick?

The Business Services sector covers an array of services that include marketing, consulting, staffing, security, telecommunications, Internet services, logistics and waste handling. Amid a diverse range of companies in the Business Services arena, picking the right stock for your portfolio could appear to be a colossal task. An easy way to narrow down the list is to look at stocks that have a solid Zacks Rank and a favorable Earnings ESP .

Earnings ESP is our proprietary methodology for determining which stocks have the best chance to surprise with their next earnings announcement. The Earnings ESP shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.

The combination of a Zacks Rank #1 (Strong Buy) or #2 (Buy) or #3 (Hold) and a positive Earnings ESP is usually a harbinger of an earnings beat and serves a perfect success formula on a platter. For investors seeking to benefit by applying this strategy to their portfolios, we have mentioned three Business Services stocks below, which match these criteria, and thus may be potential winners this earnings season.

Everi Holdings Inc. ( EVRI ): Founded in 1998 and Headquartered in Las Vegas, NV, Everi offers video and mechanical reel gaming content and technology solutions, integrated gaming payments solutions and compliance and efficiency software. The company serves over 1,000 gaming establishment across the world.

The company has a long-term earnings growth expectation of 20.0%. Everi currently carries a Zacks Rank #3 along with an Earnings ESP of +14.29%. The company is expected to report its third-quarter 2015 results after the closing bell on Nov 3.

Copart, Inc. ( CPRT ): Headquartered in Dallas, TX, Copart provides online auctions and vehicle remarketing services. The company links sellers to over 750,000 members in over 150 countries worldwide through its multi-channel platform.

This Zacks Rank #3 stock has a long-term earnings growth expectation of 15.0%, forward PE of 19.4x and an Earnings ESP of +9.3%. The company is scheduled to report its first-quarter fiscal 2016 results on Nov 23.

Visa Inc. ( V ): Incorporated in 2007, Visa operates as a retail electronic payments network worldwide. Headquartered in San Francisco, CA, the company connects consumers, businesses, financial institutions, and governments in over 200 countries and territories to fast, secure and reliable electronic payments.

The company has a long-term earnings growth expectation of 17.7% and a forward PE of 26.1x. Visa currently carries a Zacks Rank #3 along with an Earnings ESP of +8.07%. The company is expected to report its fourth-quarter fiscal 2015 results before the opening bell on Nov 2.

Moving Forward

Diane Swonk, chief economist at Mesirow in Chicago observed: "It is hard for firms to commit to expanding plants and upgrading equipment in a global economy that continues to deliver so many speed bumps." As the U.S. stocks appear volatile with a topsy-turvy economy, a sneak peek to the space for some possible outperformers backed by a solid Zacks Rank and a positive Zacks Earnings ESP could be a great idea for investors to gain from this earnings season.

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EVERI HOLDINGS (EVRI): Free Stock Analysis Report

COPART INC (CPRT): Free Stock Analysis Report

VISA INC-A (V): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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