To Begin With
In today’s world, companies strive to remain focused on functions
and activities that are close to their core competence and provide
competitive advantages. But the complex marketplaces in which
companies perform demand a host of other functions as well. This
need opens the door of opportunities for providers of business
services.
Business services can be defined as ancillary services provided by
companies to other players in the market. It can also be called a
tertiary sector. Hence, the main business of one company can be a
business service for another. But given its unique nature, Zacks
has classified the group as one of 16 sectors (the S&P has only
10 sectors and business services is part of its ‘Industrials’).
The business service sector is highly fragmented, with no single
service provider showing market dominance. As per business reports,
the top 50 companies of the sector contribute less than 25% of
overall revenue of this 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
US 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
industry.
Industries in the Business Service Sector
Advertising & Market Services and Direct Marketing plays a
vital role in informing consumers about new products, eventually
helping the producers to better penetrate the markets.
The
Interpublic Group of Companies, Inc. (IPG),
Omnicom Group Inc. (OMC),
Valassis
Communications Inc. (VCI),
Harte-Hanks
Inc. (HHS) and Vertis are important players in this
sector.
Consulting Service providers offer expert advice in a given field
for smoother functioning of the companies. Major companies in this
arena include
Accenture plc (ACN), Bain, Booz
Allen, Deloitte Consulting (an affiliate of Deloitte Touche
Tohmatsu), and
IBM Global Services (IBM).
The Staffing business helps companies identify and recruit the
right person for the right job. This sector is dominated by
Insperity Inc. (NSP),
Kelly Services
Inc. (KELYB),
ManpowerGroup (MAN), ADP
TotalSource and the U.S. operations of Adecco.
Internet Service Providers and Telecommunication Services act as a
bridge to connect knowledge, information and personnel across the
globe. This sector is ruled by
AOL Inc. (AOL),
AT&T Inc. (T),
Verizon Communications
Inc. (VZ) and
Comcast Corporation
(CMCSA).
Surveillance, Investigation & Security Consulting Services
providers offer specialized security services. This sector is
dominated by
FTI Consulting (FCN) and Kroll.
Waste Management service providers offer services such as
collection, transport, processing, recycling, disposing and
monitoring of waste.
Waste Management Inc. (WM),
Republic Services Inc. (RSG) and
Waste
Connections Inc. (WCN) are the major players in this
arena.
The U.S. and Europe are the largest markets for the business
service sector. Some of the dominant players beyond the U.S.
boundary include waste and remediation services provider
Veolia Environnement (VE) (France), facilities
support services provider Serco Group (UK), staffing services
provider Adecco (Switzerland), travel agency service provider TUI
Travel (UK), and security services provider G4S (UK). Other big
names in the field are Rentokil Initial (UK) and ISS (Denmark).
The emerging economies such as India and China are also becoming
important destinations for the business service sectors.
Earnings Review
Out of the 31 companies under the Zacks coverage universe of the
Business Service industry, only 42% could beat earnings estimates
in the last reported quarter. The average surprise was 37.7%. While
the highest surprise came from
SPS Commerce, Inc.
(SPSC) (800%) the lowest was from
Rentrak
Corporation (RENT) (-150%).
The average earnings surprise from Advertising & Market
Services and Consulting Service, the two major components of
Business Service sector, failed to impress.
Of the 18 companies under our Consulting Industry coverage,
Information Services Group, Inc. (III) delivered
the highest surprise of 300%, with the lowest of -100% coming from
Hill International, Inc. (HIL). However, most of
the companies delivered a positive surprise in the last concluded
quarter.
The average surprise from the Advertising & Market Services
Industry (14 companies under our coverage) was a negative 24.6%,
with less than 50% of the company delivering a positive earnings
surprise.
The divergence further establishes the fragmented nature of the
sector.
OPPORTUNITIES
Labor Intensive: Given the nature of intangible products
offered by the service sector, it is labor intensive. Labor, both
skilled and unskilled, is essential for the smooth functioning of
this sector. Being a labor-intensive sector, it offers immense
employment opportunities.
Global Reach: Companies can reach its consumers or
prospective buyers across the globe when Advertising & Market
Services and Direct Marketers act on behalf of them in informing
consumers about new products or added features of existing
products. Thus, these service providers help in widening a
company’s customer base and/or maintaining a better retention
ratio.
Cost Effective: All business operators prefer to minimize
costs of operation and maximize margins. This sector offers cost
effectiveness to the companies that opt for their services.
Companies will have to incur higher costs if a company employs the
services by themselves and does not take the help of the service
providers.
Service providers specialize in particular services and reduce the
operational cost of a company, eventually helping companies to
limit overall costs. Notably, an increased number of companies
opting for such specialized services would increase volumes for the
service providers. As a result, they can offer services at a lower
cost, which in turn further lower costs for companies.
Specialized Service: The industry offers specialized
services based on the latest technologies. This is evident for the
security and consulting services. To safeguard data, companies are
compelled to engage security service providers, who need to have
the latest and most efficient technologies in place to persuade
their clients and win business contracts.
Also, with the increased number of mergers and acquisitions across
the globe, the prospects for legal service providers look good.
Consulting service is another wing of this industry that is gaining
traction these days.
With business complexities on the rise, companies are opting for
expert advice before entering into any new venture rather than
risking losses due to trial and error. Hence, this service sector
also looks promising as it is indispensable for companies that are
fighting to survive in a competitive market.
CHALLENGES
Growth Tied to Health of Economy: One of the major factors
that could impact the growth of the service sector is the overall
health of the economy. The companies in the business service sector
derive revenue by providing essential services to other companies.
Spending by companies to avail services might reduce drastically if
the pace of economic growth is slower than the expected level. This
would naturally reduce the business of the service providers and
affect their fundamentals.
Requires Continuous Spending for Research and Development:
Importantly, consulting service providers need to remain abreast of
the latest technologies through continuous spending on research and
development. The performance of these providers can be hampered if
they do not acclimatize and/or widen its services with ongoing
developments.
Training, Maintaining Skilled Workforce: Since skilled
workers are always in high demand, there remains a possibility of
high turnover rate within the sector. The training of unskilled
workers or taking in new skilled workers increases operational
costs, thereby affecting margins. This sector needs to have a more
skilled workforce to take advantage of the technology that develops
at a relatively rapid pace.
Competition: Maintaining or increasing market share
remains a challenge for business service providers. As discussed
earlier, the main business of one company can be a business service
for another company; hence target customers for both may be the
same at times. Therefore, a business service provider is always
required to be adequately equipped to win over customer demand.
While larger providers bank on the broader variety of their service
offerings and can effectively take up difficult ventures, the
relatively smaller players compete in the industry backed by their
specialized services.
The Zacks Consensus Estimate for the Business Service industry for
2013 lies between -$1.75 and $2.42 per share.
Zacks Industry Rank
The Zacks Industry Rank, which derives its predictive power from
the time-tested Zacks Rank, helps us identify the industries that
are expected to outperform others. The top 1/3rd of the Zacks
Industry Rank qualifies as industries with ‘Good’ prospects, the
bottom 1/3rd as those with ‘Bad’ prospects, and the middle 1/3rd as
those that are ‘Neutral.’ Most of the constituent ‘industries’ in
the business services sector fall in the top 1/3rd of the list.
Business Service, at Zacks Rank #45, is placed in the top 20% of
the industries or in the top 1/3 of the total Zacks industry rank
list. Most of these companies carry a Zacks Rank #3 (Hold).
The Consulting industry is currently at #26, which puts it in the
top 10% of the industries. Of the 18 companies in the Consulting
industry, 8 have Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy),
while only 3 have Zacks Rank #4 (Sell) or Zacks Rank #5 (Strong
Sell). Companies like
Towers Watson & Co. (TW)
and
CRA International Inc (CRAI) are Zacks Rank
#1s while
CoreLogic Inc (CLGX) has Zacks Rank
#2.
Internet commerce, currently positioned as #60, has companies that
mostly carry Zacks Rank #3. The industry has made its place within
the top 25%.
Almost 80% of the companies, under the #95 ranked Advertising &
Market Services Industry, including players like Interpublic Group,
Omnicom and Harte-Hanks, carry a Zacks Rank #3.
The Financial Transaction Services industry, with players like Visa
and Mastercard, is currently at #108, or in the middle 1/3
block.
To Conclude
A dearth of skilled labor in the business services sector can have
an impact on future growth possibilities. Non-availability of
quality workforce at a reasonable rate might increase overall
operational costs.
However, due to the highly fragmented nature of the industry, it is
difficult to set a distinct trend or predict a concrete future for
the industry. The expected annual compounded growth rate for this
sector is 4% from 2010 to 2015.
With population growing at an accelerated pace 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. Thus, we can
safely say that despite all the hurdles, this industry is essential
to business operations going forward.
CORELOGIC INC (CLGX): Free Stock Analysis Report
CRA INTL INC (CRAI): Free Stock Analysis Report
FTI CONSULTING (FCN): Free Stock Analysis Report
HARTE-HANKS INC (HHS): Free Stock Analysis Report
INTL BUS MACH (IBM): Free Stock Analysis Report
INTERPUBLIC GRP (IPG): Free Stock Analysis Report
KELLY SVCS B (KELYB): Get Free Report
MANPOWER INC WI (MAN): Free Stock Analysis Report
INSPERITY INC (NSP): Free Stock Analysis Report
OMNICOM GRP (OMC): Free Stock Analysis Report
REPUBLIC SVCS (RSG): Free Stock Analysis Report
TOWERS WATSON (TW): Free Stock Analysis Report
VALASSIS COMMS (VCI): Free Stock Analysis Report
VEOLIA ENVIRON (VE): Free Stock Analysis Report
WASTE CONNCTION (WCN): Free Stock Analysis Report
WASTE MGMT-NEW (WM): Free Stock Analysis Report
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