Economic strength, rising demand for service activities and the influx of foreign talent resulting in lowering talent costs are supporting the Zacks Business - Services industry players to thrive in the market.
Driven by these positives, investors interested in the industry should focus on stocks like SGS SGSOY, Brookfield Business Partners BBU and Willdan Group WLDN.
About the Industry
The Zacks Business-Services industry comprises companies that offer a range of services, including specialty rental, supply-chain management, electronic commerce, technology, document management, digital audience, data, voice, analytical and business transformation. The pandemic has changed the way industry players conduct business and deliver services. The industry’s key focus is currently on channeling money and efforts toward more effective operational components, such as technology, digital transformation, data-driven decision-making and enhanced cybersecurity. Service providers are increasing their efforts toward formulating and reassessing strategic initiatives, and targeting end markets to position themselves suitably in the post-pandemic era and better utilize the opportunities that the economic recovery will bring.
What's Shaping the Future of the Business Services Industry?
Economic Recovery: The sector is a major beneficiary of the broader economy and service activities. According to the estimate released by the Bureau of Economic Analysis, GDP grew at an annual rate of 2.5% in 2023 compared with 1.9% in 2022. Economic activities in the non-manufacturing sector are encouraging. The Services PMI measured by the Institute for Supply Management has stayed above the 50% mark in 46 of 49 months.
Demand Stability: The industry is mature, with demand for services in good shape for a while now. Revenues and cash flows are anticipated to gradually reach the pre-pandemic levels, aiding most industry players to pay out stable dividends.
Relaxed Immigration Restrictions: Rising talent costs due to a competitive talent market have been a headwind for the industry. However, growing immigration is helping service providers thrive with the increased flow of foreign talent.
Zacks Industry Rank Indicates Solid Near-Term Prospects
The Business-Services industry is housed within the broader Business Services sector. It carries a Zacks Industry Rank #93, which places it in the top 37% of more than 251 Zacks industries.
The group’s Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates underperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than two to one.
Before we present a few stocks that you may want to consider for your portfolio, let us take a look at the industry’s recent stock-market performance and current valuation.
Industry's Price Performance
The Zacks Business Services industry has underperformed the S&P 500 and broader sector in the past 12 months.
The industry has gained 7.4% compared with the S&P 500 composite’s growth of 27% and the broader sector’s rise of 20.7%.
One-Year Price Performance
Industry's Current Valuation
On the basis of the forward 12-month price-to-earnings (P/E) ratio, which is commonly used for valuing business-services stocks, the industry is currently trading at 20.88X compared with the S&P 500’s 21.51X and the sector’s 24.38X.
Over the past five years, the industry has traded as high as 52.42X and as low as 10.11X, with the median being 23.18X, as the charts below show.
Price to Forward 12-Month P/E Ratio
3 Service Stocks to Bet On
We have presented three stocks that are well-poised to grow in the near term.
Willdan Group: This professional, technical and consulting services provider rides on strong revenues across engineering and program management. The rising backlog of new contracts and the acceleration in utility program management revenues aid the top line.
WLDN witnesses strong balance sheet ratios due to strong earnings and a focus on working capital management. In addition to that, unused lines of credit and cash balances provide the company with a solid platform of liquidity to finance growth in the long run.
WLDN flaunts a Zacks Rank #1 (Strong Buy) at present. The Zacks Consensus Estimate for 2024 bottom line has increased 5.9% in the past 60 days. Wildan Group shares have gained 16% in the past three months.
You can see the complete list of today’s Zacks #1 Rank stocks here.
SGS: This provider of inspection, testing and verification services benefits from its market position, strengthened by acquisitions of ArcLight and Gossamer. SGSOY’s Strategy 2027 is well on track. Sustainability is its primary growth driver for both testing and certification businesses. SGS is quadrupling its PFAS testing capacity in North America, which will provide significant opportunities in the future.
SGSOY is a pioneer in ESG assurance and is preparing a global rollout of its portfolio of services to meet the surging demand. Investments made in cybersecurity have turned out to be the key growth drivers for the company.
SGSOY has a Zacks Rank #2 (Buy) at present. The Zacks Consensus Estimate for 2024 bottom line increased 2.6% in the past 60 days. SGS shares have gained 20.5% in the past three months.
Brookfield Business Partners: The private equity firm specializing in growth and acquisition gains from the industrial and business services segments. The industrial segment benefits from the strong performance of its advanced energy storage operations that witness favorable pricing, an improved mix on the shift to higher-margin advanced batteries and ongoing operational efficiency initiatives.
The business services segment benefits from the increase in the contribution of the company’s residential mortgage insurer. BBU has a strong liquidity position that provides it with good flexibility to continue to support growth and optimize its balance sheet.
BBU currently carries a Zacks Rank #2. The Zacks Consensus Estimate for 2024 EPS has increased 8.4% in the past 60 days. Brookfield Business Partners’ shares have gained 14.2% in the past three months.
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