To Begin With
Business services -- the teritary sector -- can be defined as
ancillary services provided by companies to other players in the
market. Hence, the core business of one company can be a business
service for another.
The tertiary sector is being increasingly depended upon by firms
which require business services that are not their core competence.
The companies aim at functions and activities that are close to
their core competence thereby becoming more competitive. By doing
so, they can reap the benefits of economies of scale and
operations.
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 the overall revenue of this sector. However, 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’).
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 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 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 (U.K.), staffing services
provider Adecco (Switzerland), travel agency service provider TUI
Travel (U.K.), and security services provider G4S (U.K.). Other big
names in the field are Rentokil Initial (U.K.) and ISS
(Denmark).
The emerging economies such as India and China are also becoming
important destinations for the business service sectors.
Zacks Industry Rank
Within the Zacks Industry classification, given the varied nature
of the sector, the business service is classified as one of the 16
sectors. We rank all 260+ industries in the 16 Zacks sectors based
on the earnings outlook for 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 260+ companies is that the outlook for
the top one-third of the list (Zacks Industry Rank of #88 and
lower) is positive, while the outlook for the bottom one-third
(Zacks Industry Rank #177 and higher) is negative.
Please note that the Zacks Rank for stocks, which are at the core
of our Industry Outlook, has an impressive track record, verified
by outside auditors, to foretell stock prices, in particular over
the short term (1 to 3 months).
Business Service, at Zacks Rank #49, 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 #95. Of the 19 companies in
the Consulting industry, 5 have Zacks Rank #2 (Buy), while only 2
have Zacks Rank #4 (Sell) or Zacks Rank #5 (Strong Sell), implying
that most of the companies carry a Zacks Rank #3 (Hold). Companies
like
Huron Consulting Group Inc. (HURN) and
Information Services Group, Inc. (III) have a
Zacks Rank #2 while
CoreLogic Inc (CLGX) and
Accenture plc (ACN) are Zacks Ranked #3.
Internet commerce, currently positioned as #89, has companies that
mostly carry Zacks Rank #3. The industry has made its place within
the top 40%.
Almost 67% of the companies, under the #85 ranked Advertising &
Market Services Industry, including players like Interpublic Group
and Omnicom, carry a Zacks Rank #3.
The Financial Transaction Services industry, with players like
Visa (V) and
Mastercard (MA), is
currently at #67, or in the top 1/3 block.
Earnings Preview
With companies starting to release their second quarter financial
reports, let’s take a look at how things are shaping up for the
sector.
Earnings for the business sector have grown 9.7% in first quarter,
faring better than the S&P Group’s earnings growth of 2.4%.
Earnings were also better than 8.6% growth achieved in the last
quarter of 2012.
Revenues showed an improvement of 2.8%, faring much better than the
S&P 500’s year-over-year average of negative 1.1%. Revenue
growth also improved sequentially.
In terms of surprises, the sector’s performance was weaker than the
broader market, with only 52.6% of Business Services companies
beating earnings expectations, compared to the ‘beat ratio’ of
65.2% for the S&P 500.
Looking ahead at the second quarter results, earnings are expected
to improve 9.7% compared to a minimal improvement of 1% for the
broader market. Revenue growth is expected to be 1.6% for the
sector but decline 0.8% for the S&P 500.
Consolidations in Q2
Mergers and acquisitions play an important part in not only
strengthening a company’s foothold by grabbing more market share
but also edging out competition.
Healthcare Services Group, Inc. (HCSG), provider
of housekeeping, laundry, linen, facility maintenance and dietary
services to nursing homes, retirement complexes, rehabilitation
centers, and hospitals in the United States, entered into a deal
with Platinum Health Services, LLC to purchase all of its operating
assets.
Cardtronics, Inc. (CATM) is busy making
acquisitions. This provider of automated consumer financial
services, purchased the assets of Rohnert Park, CA-based Merrimak
ATM Group, LLC in June. In May it purchased the assets of Portland,
OR-based Aptus Financial.
Global vehicle rental giant
Avis Budget Group,
Inc. (CAR) acquired Payless Car Rental, the sixth largest
car rental company.
Furmanite Corporation (FRM), provider of
specialized technical services, has also entered into a deal to buy
the Gulf coast operations of
ENGlobal Corporation
(ENG). These are ENGlobal Corp.’s professional service assets.
OPPORTUNITIES
Labor Intensive: Given the nature of intangible products
offered by the service sector, it is labor intensive. The sector
offers immense employment opportunities as it requires both skilled
and unskilled labor for its smooth functioning. Business reports
indicate that the two most populated countries, China and India,
are together expected to create 300 million employment
opportunities in the global job market by 2030.
Global Reach: Companies can reach their consumers or
prospective buyers across the world when Advertising & Market
Services and Direct Marketers act on behalf of these in informing
consumers about new products or added features in existing
products.
Thus, these service providers help in widening a company’s
customer base and/or maintaining a better retention ratio. It also
opens the door to international trade.
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 which
would otherwise be far more expensive.
With specialized services, these providers reduce the operational
cost and in turn the overall costs of companies. Notably, an
increased number of companies opting for such specialized services
would increase volumes for the service providers. This would
eventually lead to services at lower costs and further reduction in
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, which are required
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 fast
gaining traction.
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
generate revenues by providing 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 their services with ongoing
development.
Training, Maintaining Skilled Workforce: Since skilled
workers are always in demand, there remains a possibility of a 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 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; 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.
To Conclude
The 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.
The sector might also attract new investors’ attention as nearly
one-third of the companies under our coverage in the business
service industry share profits with their shareholders via dividend
payments. Dividend payments help in retaining stockholders
confidence in the company. Dividend yield ranges from 1.16% at
Core-Mark Holding Company, Inc. (CORE) to 6.35% at
SouFun Holdings Ltd. (SFUN). Notably, every
company’s dividend yield betters the industry average.
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 crucial
for business operations going forward.
ACCENTURE PLC (ACN): Free Stock Analysis Report
AOL INC (AOL): Free Stock Analysis Report
AVIS BUDGET GRP (CAR): Free Stock Analysis Report
CARDTRONICS INC (CATM): Free Stock Analysis Report
CORELOGIC INC (CLGX): Free Stock Analysis Report
COMCAST CORP A (CMCSA): Free Stock Analysis Report
CORE-MARK HLDG (CORE): Free Stock Analysis Report
ENGLOBAL CORP (ENG): Get Free Report
FURMANITE CORP (FRM): Free Stock Analysis Report
HEALTHCARE SERV (HCSG): Free Stock Analysis Report
HARTE-HANKS INC (HHS): Free Stock Analysis Report
HURON CONSLT GP (HURN): Free Stock Analysis Report
INTL BUS MACH (IBM): Free Stock Analysis Report
INFORMATION SVC (III): Free Stock Analysis Report
INTERPUBLIC GRP (IPG): Free Stock Analysis Report
KELLY SVCS B (KELYB): Get Free Report
MASTERCARD INC (MA): Free Stock Analysis 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
SOUFUN HLDG-ADR (SFUN): Free Stock Analysis Report
AT&T INC (T): Free Stock Analysis Report
VISA INC-A (V): Free Stock Analysis Report
VALASSIS COMMS (VCI): Free Stock Analysis Report
VEOLIA ENVIRON (VE): Get Free Report
VERIZON COMM (VZ): Free Stock Analysis Report
WASTE CONNCTION (WCN): Free Stock Analysis Report
WASTE MGMT-NEW (WM): Free Stock Analysis Report
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