As geopolitical tension seems to cast a shadow on the high-flying equity markets across the globe, a weak home construction report further sank domestic stock markets to their recent lows over the last week. With investors contemplating taking the money out of the volatile equity market for investment in safe-haven assets like the U.S Treasury and gold, stakes of a mini market crash are significantly high.
Markets have an innate tendency to move from order to disorder. Will the second-quarter corporate releases follow a similar trend? The season was kicked off by a solid performance from the Banking sector on the back of modest improvements in lending and investment banking. However, will these early signs of strength merely be a mirage as more and more earnings releases come up?
Q2 Earnings Season: As it is Shaping Up
The current expected second-quarter earnings growth for the S&P 500 is pegged at +4.8% with revenues anticipated to rise by +2.2%. This include a double-digit earnings improvement in the Construction sector (+11.9%), Business Services (+11.0%) and Utilities (+10.6%).
So far, about 73 S&P 500 companies have already reported earnings. With a ‘beat ratio’ of 68.5% and a median surprise of +3.5%, total earnings for these companies are up +5.5% year over year. Top-line growth has aggregated +3.8% compared with the year-ago period, with a healthy revenue ‘beat ratio’ of 50.7% and a median surprise of +1.4%.
Most of this growth is attributable to a steady yet improving U.S. job market as the unemployment rate declined to 6.1% in June with total non-farm payroll employment increasing by 288,000. The GDP growth estimates for the second quarter are currently pegged at around +3%. For 2014, the U.S. GDP growth is expected to be +2.0 – 2.2% following an unexpected contraction of 2.9% in the first quarter. Commensurate with these expectations, earnings for the S&P 500 are expected to be up 7.1% in 2014 and a further 11.7% in 2015.
Amid these mixed market feelers, most companies in the Business Services industry would aim to hold their purse strings until at least a clearer picture of the economic policy unravels. The primary growth drivers in this highly fragmented industry hinge on a healthy economy with decent job growth prospects, 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.
However, as the current market conditions remain highly unpredictable with a clouded economic scenario, most companies have curtailed their operating costs, reduced marketing expenses and have deferred new business initiatives. Despite these factors, the Business Services sector is expected to outperform the overall equity market with a double-digit earnings growth expectation in the second quarter versus 4.8% for the S&P 500 index.
Given the promising 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 should help these stocks outperform in the near term.
How to Take Your Pick?
The Business Services sector covers an array of services that include marketing, consulting, staffing, security, telecommunications, Internet services, logistics and waste handling. Amid a diverse range of companies in the Business Services arena, picking the right stock for your portfolio could appear to be a colossal task. An easy way to narrow down the list is to look at stocks that have a solid Zacks Rank and a favorable Zacks Earnings ESP.
Earnings ESP is our proprietary methodology for determining which stocks have the best chance to surprise with their next earnings announcement. The Earnings ESP shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.
The combination of a Zacks Rank #1 (Strong Buy) or #2 (Buy) or #3 (Hold) and a positive Earnings ESP is usually a harbinger of earnings beat and serves a perfect success formula on platter in this challenging macroeconomic environment. For investors seeking to benefit by applying this strategy to their portfolios, we have mentioned three Business Services stocks below which match these criteria, and thus may be potential winners this earnings season.
Visa Inc. (V): Based in San Francisco, CA, Visa operates as a retail electronic payments network, facilitating electronic payment, risk management, and payment security solutions to online merchants. The company also offers a host of issuer processing services for participating issuers of Visa debit, prepaid, and ATM payment products under the Visa, Visa Electron, Interlink, and PLUS brands.
The company is anticipating strong quarterly earnings, which is expected to be up 11.2% year over year with the current Zacks Consensus Estimate being pegged at $2.09. Analysts have been moving their quarterly and fiscal estimates higher of late, further suggesting a solid earnings momentum in the imminent quarters.
Visa currently carries Zacks Rank #2 along with an Earnings ESP of +0.96%. The company is expected to report its third quarter fiscal 2014 results after the closing bell on Jul 24.
FTI Consulting, Inc. (FCN): Based in Baltimore, MD, FTI Consulting provides specialized consulting services across 26 foreign countries with a total headcount of more than 4,200 employees. This global business advisory firm has a team of highly qualified professionals who provide problem-solving and technology services primarily to major corporations, financial institutions and law firms.
The company has a long-term earnings growth expectation of 12.0%. Analysts have been moving their second quarter and full year estimates higher for the stock, further implying a healthy earnings momentum in the imminent quarters.
FTI Consulting currently has Zacks Rank #2 along with an Earnings ESP +1.96%. The company is expected to report its second-quarter 2014 results before the market opens on Jul 31.
Iron Mountain Inc. (IRM): Headquartered in Boston, MA, Iron Mountain offers storage and information management services across the globe. In addition to indispensable solutions for record management, data management, document management, and secure shredding, the products of the company help organizations to lower storage costs, comply with regulations, recover from disaster and better use their information for business advantage.
The company is anticipating strong second-quarter earnings, which is expected to increase 25.0% year over year with the current Zacks Consensus Estimate pegged at 36 cents. Analysts have revised their quarterly and full-year estimates upward, which further signify a solid earnings momentum for the company.
Iron Mountain currently has Zacks Rank #2 along with an Earning ESP of +13.89%. The company is expected to report its second-quarter 2014 results before the market opens on Jul 31.
The ramifications of a potential crisis due to a geopolitical impasse may severely affect the economy unless a balanced fiscal policy is etched out. As the U.S. stocks look to gain solidarity amid the inconsistencies, a sneak peek to the space for some possible outperformers backed by a solid Zacks Rank and a positive Zacks Earnings ESP could be a great idea for investors to gain from this earnings season.
Read the analyst report on V
Read the analyst report on FCN
Read the analyst report on IRM
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