4 Business Services Stocks Likely To Excel In Q4 Earnings

The U.S. GDP increased 2.6% in the fourth quarter, down from 3.2% in the prior quarter, largely due to higher imports as consumer spending recorded the highest rise in three years. The paradoxical GDP tally masks the bullish overall economic sentiment buoyed by some sweeping policy changes by President Donald Trump.

The historic overhaul of the tax structure to reduce tax liabilities from 35% to 21% has boosted corporate earnings, stoked investments and trickled down to employees in some instances. In addition, Trump’s pledge to spend $1 trillion in infrastructure projects over a period of 10 years and regulatory rollbacks remained tailwinds. Improvements in the labor market and rise in wages have led to higher consumer spending. Additionally, three interest rate hikes in 2017 by the Fed, indicating inherent economic stability, have boosted investors’ confidence.

Economic Growth Momentum

The U.S. manufacturing activity continued its robust performance in December as the manufacturing index measured by the Institute for Supply Management recorded 59.7%, bringing the average tally for 2017 to 57.6% — the highest since 2004. Fueled by domestic business investments, improving global economies and steady spending by American households, the manufacturing activity is likely to move north in the near future.

There were 148,000 job additions in December and the economy added about 2 million jobs in 2017. The unemployment rate fell to 4.1% - the lowest in 17 years, due to higher participation rate of 62.7% as more people looked for work, a clear indication that the economy is improving. Wages improved 2.5% from the year-ago period.

Enjoying the fruits of a resurgent job market, low inflationary pressures and cheaper oil bills, consumer confidence strongly held its fort. The Conference Board Consumer Confidence index increased to 125.4 in January from 123.1 in December, signifying optimism about the U.S. economy.

As the companies take stock of the situation and deliberate on their future course of action, let’s take a look at how the fourth-quarter earnings are shaping up so far for the business services sector.

Business Services Sector Performance

About 15.4% of the total S&P 500 companies in the Business Services sector reported their earnings through Jan 24, 2018. With a ‘beat ratio’ of 75%, total earnings for these companies are up 10.7% year over year. Revenues increased 7.7% from the year-ago period, with a ‘beat ratio’ of 75%.

The entire sector is expected to perform lower than the overall index. The earnings growth expectation for the sector is 6.8% versus 11.6% for the S&P 500. (Read: Facebook (NASDAQ:FB), Apple (NASDAQ:AAPL), Google (NASDAQ:GOOGL) and Amazon (NASDAQ:AMZN)'s Q4 Earnings)

The primary growth drivers in this highly fragmented industry hinge on a healthy economy with decent prospects of job growth, higher disposable income and new business initiatives. An ideal mix of services, effective marketing strategies and ability to retain and attract new customers make the perfect recipe for profitability for most of these companies.

Given the forecast, it might be a good idea to zero in on a handful of Business Services stocks that are poised to beat earnings estimates this quarter. An earnings surprise is likely to help these stocks outperform in the near term.

How to Pick?

The Business Services sector covers an array of services including marketing, consulting, staffing, security, telecommunications, Internet services, logistics and waste handling. Amid a diverse range of companies in this arena, picking the right stock for your portfolio might appear to be a colossal task. An easy way to narrow the list is by choosing stocks that have a favorable Zacks Rank and a positive Earnings ESP with the help of the Zacks Stock Screener.

Earnings ESP is our proprietary methodology for determining which stocks have the best chances to surprise with their next earnings announcement. The Earnings ESP shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

The combination of a Zacks Rank #1 (Strong Buy) or 2 (Buy) or 3 (Hold) and a positive Earnings ESP is usually an indicator of a likely earnings beat.

We have mentioned four Business Services stocks below which match these criteria, and thus may be potential winners in fourth-quarter earnings.

Republic Services Inc (NYSE:RSG). (RSG): Republic Services is the second largest domestic non-hazardous solid waste company in the United States. It provides non-hazardous solid waste disposal services for commercial, industrial, municipal and residential applications across the country and Puerto Rico.

The company has a long-term earnings growth expectation of 8.5%. Republic Services has an Earnings ESP of +0.88% and carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here. The company is slated to report results after the closing bell on Feb 8.

Verisk Analytics, Inc. (VRSK): Headquartered in Jersey City, NJ, Verisk offers data analytics services to diverse industries such as insurance, natural resources, healthcare, financial services, government and risk management. Leveraging unique data assets and deep domain expertise, Verisk provides first-to-market predictive analytics and decision support solutions that are integrated into customer workflows for a positive outcome.

This Zacks Rank #3 stock has an Earnings ESP of +0.35%. The company is likely to report results on Feb 20.

S&P Global Inc. (SPGI): Formerly known as McGraw-Hill (NYSE:SPGI) Financial, S&P Global is the provider of financial information and is the owner of one of the top credit rating agencies (Standard & Poor’s). The company primarily focuses on capital and commodities markets and includes iconic brands like S&P Ratings, S&P Capital IQ, S&P Indices and Platts.

The company has a long-term earnings growth expectation of 12.5%. S&P Global carries a Zacks Rank #2 along with an Earnings ESP of +0.72%. The company is slated to report results before the market opens on Feb 6.

Gartner, Inc. (IT): Headquartered in Stamford, CT, Gartner is reportedly the world’s leading information technology research and advisory firm. The company offers rich domain expertise and technology-related insight necessary for informed decision-making process. Over the years, Gartner’s comprehensive services portfolio has enabled customers across the spectrum to research, analyze and interpret the business with greater precision, efficiency, and discipline.

The company has a long-term earnings growth expectation of 16%. Gartner currently carries a Zacks Rank #3 along with an Earnings ESP of +1.40%. The company is slated to report results before the market opens on Feb 6.

Moving Forward

As the fourth-quarter earnings picture looks quite promising driven by a resilient economy, a sneak peek at some possible outperformers backed by a solid Zacks Rank and a positive Earnings ESP could be a great idea for investors to gain from this earnings season.

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