Business Services Stock Outlook - Oct. 2015

Business Services: Growing Contribution to GDP - Part 1

The intensely competitive business services sector must regularly work toward controlling costs and generating revenues lest its profitability suffers. A focus on functions and activities close to its core competence is a prerequisite in their reaping the benefits of economies of scale, besides improving their competitive positioning.

The business services sector provides ancillary services to other players in the market. Hence, the core business of one company in this sector can be a business service for another. Importantly, this dynamism opens the door to many business services companies.

Notably, business service occupies a handsome share in a country's gross domestic product (GDP) with the gradual shift in the global economy from agriculture to industry to now business services. The sector therefore plays a major role in a country's overall development.

The fortunes of business service operators are closely tied to the health of the broader economy. As per the U.S. Bureau of Economic Analysis (BEA), the U.S. economy expanded at a 2.4% pace in 2014. Following a contraction of 7% in the first quarter, the U.S. GDP is back on the growth track with improvement of nearly 3.9% in the second quarter. The growth momentum is expected to accelerate by 2.6% for both 2015 and 2016.

This improving outlook for the U.S. economy is therefore a net positive for the sector. The bureau also estimates total industrial production to grow by 1.2% in 2015 and 1.1% in 2016, thus offering opportunities of growth and expansion to the business service providers. Moreover, a projected rise in expenditure should also lend support to the business service sector.

Economic sensitivity aside, business service companies are relatively conservatively managed, with a large number of players sharing their excess cash with shareholders through dividends and share buybacks.

Nonetheless, 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 overall revenue. However, given its unique nature, Zacks has classified the group as one of the 16 sectors (the S&P's official GIC classification has only 10 sectors where business services are grouped within the 'Industrials' sector). Notably, with about 3.4% of total market capitalization, the sector is estimated to have 2.7% share of 2015 income.

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 a consolidated yearly revenue of about $620 billion, though many companies mentioned below do not strictly fall within the generally accepted definition of the industry.

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 257 X-level industries in the 16 sectors based on the earnings outlook of 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 257+ 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, the middle one-third of the list (Rank of #89 to #176) is neutral while that for the bottom one-third (Rank #177 and higher) is a clear negative.

Please note that the Zacks Rank for stocks -- the core of our Industry Rank -- has an impressive track, verified by outside auditors, to foretell stock prices, in particular over the short term (1 to 3 months). We have seven 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 Removal Services.

Staffing ranked #27 is the only industry that falls in the upper 1/3 and has a positive outlook.

Consulting at rank #102, Business Services at #107 and Financial Transaction Services at #160, Outsourcing at #166 and Waste Removal at #167 are positioned in the mid-1/3 of all Zacks industries and have a neutral outlook.

Auction/Valuation Services with Zacks Rank #195 and Business Information Services with rank #190, fall in the bottom 1/3 of all Zacks industries and has a negative outlook.

This distribution of industry ranks within the sector shows that the overall sector has a neutral to negative outlook.

Our top picks from the Staffing Industry are Korn/Ferry International ( KFY ), ManpowerGroup Inc. ( MAN ), Resources Connection Inc. ( RECN ), Kforce Inc. ( KFRC ) and Robert Half International Inc. ( RHI ). While Korn/Ferry International sports a Zacks Rank #1 (Strong Buy), the rests carry Zacks Rank #2 (Buy).

Earnings Review

With companies already reporting their third-quarter results, let's have a look at how the sector might deliver in full swing.

About 8.7% of the companies having 12.8% market capitalization have already reported their third-quarter earnings. Earnings for the business sector show 6% growth on 1.9% revenue improvement. However, these compared unfavorably with numbers delivered by the S&P 500. In terms of surprises, so far this season, the sector's performance is stronger than the broader market. Business Services' 'beat ratio' for both earnings and revenue was 100% compared with a 'beat ratio' of 75% and 50%, respectively, for the S&P 500.

With nearly 90% of the companies yet to report, earnings are expected to improve 0.7% compared to a 4.9% decline by the S&P 500. Revenues are estimated to show improvement of 1.3% compared to a 5.6% decline by the S&P 500.

The graph below shows year-over-year bottom-line growth of the business service sector in comparison to the S&P 500.

The graph below shows year-over-year top-line growth of the business service sector in comparison to the S&P 500.

For a detailed look at the earnings outlook for this sector and others, please read our Earnings Trends report.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

ROBT HALF INTL (RHI): Free Stock Analysis Report

RESOURCES CNCTN (RECN): Free Stock Analysis Report

MANPOWER INC WI (MAN): Free Stock Analysis Report

KORN/FERRY INTL (KFY): Free Stock Analysis Report

KFORCE INC (KFRC): Free Stock Analysis Report

To read this article on click here.

Zacks Investment Research

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.

In This Story


Other Topics


Latest Markets Videos


Zacks is the leading investment research firm focusing on stock research, analysis and recommendations. In 1978, our founder discovered the power of earnings estimate revisions to enable profitable investment decisions. Today, that discovery is still the heart of the Zacks Rank. A wealth of resources for individual investors is available at

Learn More