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4 Business Services Stocks Poised for Q3 Earnings Beat

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The U.S. GDP is likely to grow around 1.5% in the third quarter, a fall from 2.1% in the prior quarter, mainly due to the devastating hurricanes — Harvey and Irma. Despite the setbacks, the overall economic sentiment remained fairly bullish buoyed by some sweeping policy changes proposed by President Donald Trump, which are likely to take effect in the ensuing quarters.

The investor-friendly policies including a pledge to spend $1 trillion in infrastructure projects over a period of 10 years, overhaul of the tax structure to reduce tax burden and regulatory rollbacks, are likely to spur higher consumer spending. They are also expected to create about 25 million new jobs over a decade. The GDP is expected to pick up pace in the fourth quarter and grow at an annualized rate of 2.6% as Trump’s policies gradually take center stage, tempered slightly by the geopolitical situations across the globe.

Economic Growth Momentum

U.S. manufacturing activity continued its robust performance and reached a 13-year high in September as the manufacturing index measured by the Institute for Supply Management recorded 60.8% — the highest since May 2004. This also serves as a precursor to the solid economic growth expected in the near future.

On an average, there were 172,000 job additions per month till September, when the economy lost 33,000 net jobs due to natural calamities. However, the unemployment rate fell to a 16-month low to 4.2% in September due to higher participation rate of 63.1% as more people looked for work, a clear indication that the economy is improving.

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 decreased slightly to 119.8 in September from 120.4 in August due to the storms, 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 third-quarter earnings are shaping up so far for the business services sector.

Business Services Sector Performance

About 16.7% of the total S&P 500 companies in the Business Services sector reported their earnings results through Oct 18, 2017. With a ‘beat ratio’ of 100%, total earnings for these companies are up 11.6% year over year. Revenues increased 5.8% from the year-ago period, with a ‘beat ratio’ of 100%.

The entire Business Services sector is expected to perform slightly lower than the overall index. The earnings growth expectation for the sector is 0.8% versus 3% for the S&P 500. (Read: Positive Start to the Q3 Earnings Season).

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 should 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 could 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 third-quarter earnings.

TransUnion (TRU): Headquartered in Chicago, IL, TransUnion is a consumer information services company that offers data and analytics solutions, particularly in credit risk management. The company is one of the three largest credit reporting agencies in the United States.

The company has a long-term earnings growth expectation of 10%. TransUnion currently has an Earnings ESP of +2.14% and carries a Zacks Rank #2. The company is slated to report third-quarter results before the opening bell on Oct 27.

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 #2 stock has an Earnings ESP of +1.72%. You can see the complete list of today’s Zacks #1 Rank stocks here. The company is scheduled to report its results after the closing bell on Oct 31.

S&P Global Inc. (SPGI): Formerly known as McGraw-Hill 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 currently carries a Zacks Rank #2 along with an Earnings ESP of +3.15%. The company is slated to report its results before the market opens on Oct 26.

Visa Inc. (V): Headquartered in San Francisco, CA, Visa operates retail electronic payments network worldwide. This industry leader offers a range of branded card payment product platforms, which customers use to develop and offer credit, charge, deferred debit, debit and prepaid payments as well as access cash.

The company has a long-term earnings growth expectation of 16.3%. Visa currently has an Earnings ESP of +1.01% and carries a Zacks Rank #2. The company is slated to report third-quarter results before the opening bell on Oct 25.

Moving Forward

As the third-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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