3 Business Services Stocks to Bet on Amid Q4 Earnings Conundrum

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The U.S. economy had an unenterprising end to 2015 as the GDP increased at a paltry 0.7% annualized rate in the fourth quarter, bringing its tally for the year to 2.4% - identical to that recorded in 2014. Although the Fed took off its brakes for the first raise in interest rates in nearly a decade in December, on perceived improvement in the economy, the short-term jitters are likely to prevent it from raising it further anytime soon.

On the surface, it appears that the economy failed to receive any 'slingshot' momentum from strong third-quarter growth, primarily due to the fallout of the growing global malaise on domestic activity. Strong dollar appreciation and the prevailing macroeconomic turmoil, led by the unprecedentedly-weak Chinese growth and a soft European market, 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. The trade deficit widened to $566.5 billion and has reportedly subtracted 0.47 percentage point from the GDP growth in the fourth quarter. Lower oil prices have further added to the woes of the industries that directly or indirectly source businesses from the energy sector.

The Negative Feelers

Non-defense capital goods orders (excluding aircraft), one of the closely watched parameters for business spending plans, contracted 4.3% in December - the largest decline of this kind since November 2009. Business spending on equipment contracted 2.5% in the fourth quarter compared to a 9.9% rise in the third quarter.

With low demand for U.S.-manufactured items, businesses accumulated $68.6 billion worth of inventory in the fourth quarter, shaving 0.45 percentage point from the fourth-quarter GDP growth. Weighed down by higher levels of inventory, overall business investment declined at an annualized rate of 1.8%, the first drop since the third quarter of 2012.

The Markit Composite Purchasing Managers Index (PMI) data declined to 53.2 in January from 54.0 in December. This represents a general slowdown in new business growth and a cautious spending pattern by clients.

The Positive Vibes

When the overall business sentiments are somewhat reeling under the bearish market stance, American households have plenty to rejoice. Buoyed by an average of 284,000 job additions in the fourth quarter, the unemployment rate stood at 5% by the end of 2015 and is expected to fall further.

Enjoying the fruits of a resurgent job market, low inflationary pressures and cheaper oil bills, consumer confidence levels went up. The Conference Board Consumer Confidence Index improved moderately in January to 98.1 from 96.3 in December. Consumer spending, which accounts for over two-thirds of U.S. economy, increased 2.2% during the fourth quarter.

As the companies take stock of the situation and deliberate on their future course of action, let us take a glimpse into how the fourth-quarter earnings season is shaping up so far.

Business Services Sector Performance

About 47.8% of the total S&P 500 companies in the Business Services sector have reported their earnings results till Feb 3, 2016. With a 'beat ratio' of 72.7%, total earnings for these companies are up 4.1% year over year. Revenues increased 2.5% compared with the year-ago period, with a 'beat ratio' of 27.3%. The entire Business Services sector is expected to perform relatively better than the overall equity market with an earnings growth expectation of 3.4% in the fourth quarter versus -5.8% for the S&P 500 index. (Read: Q4 Earnings Season Past the Halfway Mark )

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 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.

First Data Corporation ( FDC ): Founded in 1989 and headquartered in Atlanta, GA, First Data offers electronic commerce and payment solutions across the globe. The company serves approximately six million business locations and 4,000 financial institutions in 118 countries around the world.

The company has a long-term earnings growth expectation of 18.6%. First Data currently carries a Zacks Rank #1 along with an Earnings ESP of +5.26%. The company is expected to report its fourth-quarter 2015 results after the closing bell on Feb 9.

ServiceMaster Global Holdings, Inc. ( SERV ): Headquartered in Memphis, TN, ServiceMaster is a premier business services provider of essential residential and commercial services. The company operates through an extensive service network of more than 8,000 company-owned, franchised and licensed locations.

This Zacks Rank #2 stock has a long-term earnings growth expectation of 11.0%, forward PE of 20.0x and an Earnings ESP of +3.23%. The company is scheduled to report its fourth-quarter 2015 results before the opening bell on Feb 25.

ABM Industries Incorporated ( ABM ): Headquartered in New York, NY, ABM is one of the largest facility management services providers in the U.S. The company provides engineering, janitorial, parking, and security services to commercial, industrial, institutional, and retail facilities across the country.

The company has a long-term earnings growth expectation of 8.0% and a forward PE of 20.0x. ABM currently carries a Zacks Rank #3 along with an Earnings ESP of +38.46%. The company is expected to report its first-quarter fiscal 2016 results on Mar 1.

Moving Forward

Gus Faucher, senior economist at PNC Financial Services in Pittsburgh, observed: "Together with rising wages, more hiring will allow consumers to continue to spend, and that will be more than enough to power through weakness from trade and the stronger dollar." 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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FIRST DATA CORP (FDC): Free Stock Analysis Report

SERVICEMASTR GH (SERV): Free Stock Analysis Report

ABM INDUSTRIES (ABM): 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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