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3 Business Services Stocks to Beat Earnings Blues in Q1

Reminiscent of the performance in the last two years, the U.S. economy had a lackluster start to 2016 as the GDP grew at a paltry 0.5% annualized rate in the first quarter. Rather than being an indicator of a recession, the near-zero GDP growth signifies an economy that is inured to a sluggish pace of expansion with an average annual growth of 2%.
Shaking off initial jitters from a global equity sell-off and concerns for an economic slowdown in China, the domestic equity market gradually picked up steam as the investors’ fears were allayed by an apparent pick-up in China’s economy. Oil prices have also recovered steadily, while the strength of the U.S. dollar has somewhat waned.
However, the Fed has decided not to go overboard with its interest rate hikes, projecting only two hikes against four anticipated last December when it first raised interest rates in nearly a decade.
GDP Growth: An Aberration?
Many economists feel that the first-quarter GDP data is an aberration and is not a true representation of the underlying growth boosters, the most notable among which is job additions. On an average there were 209,000 job additions per month in the first quarter.
The unemployment rate rose marginally to 5% in March from 4.9% in the previous month due to a higher participation rate of 63% as more people looked for work – a clear indication that the economy was indeed improving.
Enjoying the fruits of a resurgent job market, low inflationary pressures and cheaper oil bills, consumer confidence levels went up. The Conference Board Consumer Confidence Index improved moderately in March to 96.2 from 94 in February.
The Negative Feelers
However, consumer spending, which accounts for over two-thirds of the U.S. economy, is expected to significantly decline from 2.4% in fourth-quarter 2015 as it edged up a mere 0.1% in both January and February. Economists speculated that a dent in consumption was largely triggered by a massive stock market sell-off at the beginning of the year as households cut back on purchases and were keener on savings.
Non-defense capital goods orders (excluding aircraft), one of the closely watched parameters for business spending plans, contracted 1.1% in the first quarter. Business spending on equipment advanced 1.4% in the first quarter largely driven by military equipment.
With lower orders, businesses are expected to accumulate $48–$56 billion worth of inventory in the first quarter (significantly down from $78.3 billion in the fourth quarter), as companies ramp up efforts to reduce inventory bloat, thereby paring seven-tenth of a percentage point from the first-quarter GDP growth.
The Markit Composite Purchasing Managers Index (PMI) data declined to 51.3 in March from 53.2 in January. This represents a general slowdown in new business growth and a cautious spending pattern of clients.
As the companies take stock of the situation and deliberate on their future course of action, let us take a glimpse into how the fourth-quarter earnings season is shaping up so far.
Business Services Sector Performance
About 47.8% of the total S&P 500 companies in the Business Services sector have reported their earnings results till Apr 27, 2016. With a ‘beat ratio’ of 72.7%, total earnings for these companies are up 8.6% year over year. Revenues increased 3.3% compared with the year-ago period, with a ‘beat ratio’ of 63.6%. The entire Business Services sector is expected to perform relatively better than the overall equity market with an earnings growth expectation of 5.1% in the first quarter versus -8.0% for the S&P 500 index. (Read: Low Expectations Helping Q1 Earnings Picture)
The primary growth drivers in this highly fragmented industry hinge on a healthy economy with decent prospects for 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 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 favorable Zacks Rank and a positive 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 a likely earnings beat. 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.
Fidelity National Information Services, Inc. (FIS): Founded in 1968 and headquartered in Jacksonville, FA, Fidelity offers electronic commerce and payment solutions across the globe. The company primarily focuses on retail and institutional banking, payments, asset and wealth management, risk and compliance, consulting, and outsourcing solutions.
Fidelity has a long-term earnings growth expectation of 12.0%. The company currently carries a Zacks Rank #3 along with an Earnings ESP of +2.70%. The company is expected to report first-quarter 2016 results before the opening bell on May 3.
Ritchie Bros. Auctioneers Incorporated (RBA): Headquartered in Burnaby, Canada, Ritchie is reportedly the world's largest seller of used equipment for the construction, transportation, agriculture, material handling, energy, mining, forestry, marine and other industries. The company has operations in 19 countries, including 44 auction sites across the globe.
This Zacks Rank #3 stock has a long-term earnings growth expectation of 11.1%, forward PE of 24.4x and an Earnings ESP of +4.76%. The company is scheduled to report first-quarter 2016 results before the opening bell on May 9.
Verisk Analytics, Inc. (VRSK): Headquartered in Jersey City, NJ, ABM is a premier data analytics provider serving insurance, natural resources, healthcare, financial services, government, and risk management sectors. The company offers predictive analytics and decision support solutions in rating, underwriting, claims, global risk analytics, natural resources intelligence, economic forecasting, and various other fields.
The company has a long-term earnings growth expectation of 12.1% and a forward PE of 23.9x. Verisk currently carries a Zacks Rank #2 along with an Earnings ESP of +1.30%. The company is expected to report first-quarter 2016 results after the closing bell on May 3.
Moving Forward
Ethan Harris, co-head of global economics research at Bank of America Merrill Lynch in New York, observed: “We’re just a lower-growth economy now. Within the random noise of the data, in any given year, it’ll be normal to get a near-zero quarter every year. It won’t necessarily be the sign of something bad happening.” As the U.S. stocks appear volatile with a topsy-turvy 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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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
FIDELITY NAT IN (FIS): Free Stock Analysis Report
RITCHIE BROS (RBA): Free Stock Analysis Report
VERISK ANALYTIC (VRSK): Free Stock Analysis Report
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