The U.S. economy is going through robust economic recovery despite the threat of the Delta string of coronavirus and mounting inflation. As most parts of the U.S. economy have already reopened, the business services sector should benefit from strong economic growth.
The business services sector comprises consulting, staffing, financial tractions, outsourcing, advertising, waste removal, building maintenance, technology services and auction/valuation services industries. This sector benefited from a higher demand for expertise to improve the operational efficiency of businesses and reduce their costs.
Sector Looks Promising
The struggling U.S. labor market, which suffered the most during the pandemic era, is showing signs of gradual recovery. The Department of Labor reported that nonfarm payrolls increased 943,000 in July, marking the biggest monthly jump since August 2020. Moreover, job additions in June and May were revised upward by 112,000. As more and more jobs are generated, staffing firms should benefit.
The consulting services outlook remains bright as organizations are increasingly seeking consultation in a bid to protect employees, and stay close to their customers and shareholders.
Several large and mid-sized companies are shifting from conventional data solutions to technical and domain-specific expertise, data analytics solutions, financial consultancy and operational consultancy services. This should help business service providers gain going forward.
In this era of digital transformation, enterprises are actively seeking a common ground between on-premise and cloud infrastructures that will enable them to provide flexible and easily adoptable hybrid solutions.
The business software industry is benefiting from robust demand for multi-cloud-enabled software solutions, given the ongoing transition from legacy platforms to modern cloud-based infrastructure.
The industry players are incorporating AI and tools like machine learning in their applications to make the same more dynamic and result-oriented. Elevated demand for enterprise software, which is ramping up productivity and improving the decision-making process, is a key catalyst.
U.S. businesses across sizes are expanding their scale of operations and hiring more despite soaring wages and salaries to cater to robust demand. The personal savings of Americans are around an astonishing $2 trillion. The sky-high savings are allowing people to indulge in their demands that were pent up during lockdowns and are in turn compelling businesses to expand their scale of operations.
The business services sector is a major beneficiary of manufacturing and service activities which, in turn, are dependent on the economic health. The U.S. economy grew 6.3% and 6.5% in first and second-quarter 2021, respectively.
Moreover, in absolute term, U.S. GDP in second-quarter 2021 came in at $19.4 trillion, exceeding $19.2 trillion recorded in fourth-quarter 2019, the last quarter before the global outbreak of coronavirus.
The ISM Manufacturing PMI came in at 59.5% in July, indicating expansion in the overall segment for the 14th month in a row. Moreover, the ISM Services PMI hit an all-time high of 64.1% in July. The services sector accounts for 70% of the U.S. GDP while the manufacturing sector commands around 12% of economic activities.
Finally, the business services sector is mature with demand for services being in good shape over time. Revenues, income and cash flows are anticipated to steadily make way to the pre-pandemic healthy levels, helping most industry players pay out stable dividends.
Our Top Picks
We have narrowed our search to five large-cap (market capital > $10 billion) business services stocks as these companies generally have an established business model. These stocks have strong growth potential for the rest of 2021 and saw positive earnings estimate revisions within the last 30 days.
Furthermore, these stocks have provided higher returns than the market’s benchmark S&P 500’s return of 7.9% in the past three months. Finally, each of our picks carries either a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The chart below shows the price performance of our five picks in the past three months.
Image Source: Zacks Investment Research
Gartner Inc. IT operates as a research and advisory company in the United States, Canada, Europe, the Middle East, Africa, and internationally. It operates through three segments: Research, Conferences, and Consulting.
The company offers timely, thought-provoking and comprehensive analysis that is known for its high quality, independence and objectivity. Its research reports have become indispensable tools for various companies across different sectors, strengthening its leading position in the market. It has a large and diverse addressable market with low customer concentration that mitigates operating risks.
This Zacks Rank #1 company has an expected earnings growth rate of 60.1% for the current year. The Zacks Consensus Estimate for its current-year earnings improved 21.4% over the last 30 days. The stock price has jumped 33.3% in the past three months.
The Interpublic Group of Companies Inc. IPG provides advertising and marketing services worldwide. It operates in two segments, Integrated Agency Networks and IPG DXTRA.
The company continues to attract, acquire and develop strategic, creative and digital talent from diverse backgrounds with a view to increase organic growth and strengthen its foothold in international markets. It has a disciplined acquisition strategy focused on high-growth capacities and geographies.
This Zacks Rank #2 company has an expected earnings growth rate of 40.5% for the current year. The Zacks Consensus Estimate for its current-year earnings improved 8.5% over the last 30 days. The stock price has appreciated 15.2% in the past three months.
Robert Half International Inc. RHI provides staffing and risk consulting services in North America, South America, Europe, Asia, and Australia. It operates through three segments: Temporary and Consultant Staffing, Permanent Placement Staffing, and Risk Consulting and Internal Audit Services.
Protiviti, the company’s wholly owned subsidiary through which it offers risk consulting, internal audit and information technology consulting services, is in great shape. Protiviti is increasingly focusing on technology consulting, with additional emphasis on cloud computing, cybersecurity and digital transformation.
This Zacks Rank #2 company has an expected earnings growth rate of 81.1% for the current year. The Zacks Consensus Estimate for its current-year earnings improved 17.5% over the last 30 days. The stock price has climbed 15.4% in the past three months.
TransUnion TRU provides risk and information solutions. It operates in three segments: U.S. Markets, International, and Consumer Interactive. It has an attractive business model with highly recurring and diversified revenue streams, huge operating leverage, low capital requirements and stable cash flows.
A massive data base is its most distinguishing asset and perhaps the biggest barrier to entry for competitors. The company serves a broad range of customers across multiple geographies and verticals.
This Zacks Rank #2 company has an expected earnings growth rate of 23% for the current year. The Zacks Consensus Estimate for its current-year earnings improved 3.1% over the last 30 days. The stock price has advanced 10.4% in the past three months.
Republic Services Inc. RSG provides non-hazardous solid waste collection, transfer, recycling, disposal and energy services for small-container, large-container, municipal and residential and energy services customers in the United States and Puerto Rico.
The company is focused on increasing its operational efficiency by shifting to compressed natural gas collection vehicles and converting rear-loading trucks to automated-side loaders to reduce costs. It continues to grow internally with the help of long-term contracts for collection, recycling and disposal of solid waste materials.
This Zacks Rank #2 company has an expected earnings growth rate of 13.5% for the current year. The Zacks Consensus Estimate for its current-year earnings improved 5.5% over the last 30 days. The stock price has surged 9.6% in the past three months.
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