3 Business Services Stocks to Profit on Solid Q2 Earnings

After a relatively lackluster performance in first-quarter 2017 with the GDP rising a mere 1.4%, the U.S. economy gradually picked up steam in the second quarter and reportedly grew nearly 2%. 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 that include a pledge to spend $1 trillion in infrastructure projects over a period of 10 years, overhaul the tax structure to reduce tax burden and regulatory rollbacks are likely to spur higher consumer spending and create about 25 million new jobs over a decade. The International Monetary Fund further anticipates the GDP to grow at an annualized rate of 2.1% in both 2017 and 2018 as Trump’s policies take center stage, tempered slightly by the geopolitical situations across the globe.

Economic Growth Momentum

The U.S. manufacturing activity continued its robust performance in June as the manufacturing index measured by the Institute for Supply Management recorded 57.8% – the highest since Aug 2014. This also serves as a precursor to the solid economic growth expected in the near future.

On an average, there were 194,000 job additions per month in the second quarter. The unemployment rate rose marginally to 4.4% in June due to higher participation rate of 62.8% 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 improved to 118.9 in June from 117.6 in May, 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 second-quarter earnings is shaping up so far for the business services sector.

Business Services Sector Performance

About 12.5% of the total S&P 500 companies in the Business Services sector reported their earnings results through Jul 12, 2017. With a ‘beat ratio’ of 66.7%, total earnings for these companies are up 20.4% year over year. Revenues increased 15.1% from the year-ago period, with a ‘beat ratio’ of 100.0%.

The entire Business Services sector is expected to perform slightly lower than the overall index. The earnings growth expectation for the sector is 4.5% versus 5.6% for the S&P 500 index. (Read: Bank Earnings in the Spotlight).

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 that include 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 a harbinger of a likely earnings beat.

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

MDC Partners Inc. (MDCA): Headquartered in New York, MDC Partners is one of the fastest growing and most influential marketing and communications networks in the world. With over 1,700 clients worldwide, MDC Partners leverages technology, data analytics, insights, and strategic consulting solutions to drive measurable results and optimize return on marketing investments.

The company has a long-term earnings growth expectation of 6%. MDC Partners currently has an Earnings ESP of +46.15% and carries a Zacks Rank #2. The company is expected to report its results on Jul 27.

ManpowerGroup Inc. (MAN): Headquartered in Milwaukee, WI, ManpowerGroup is the global leader in the employment services industry and has a well-established network of 2,900 offices in 80 countries. The company offers its services to approximately 400,000 clients, including small and medium sized enterprises across all industry sectors as well as the world's largest multinational corporations.

This Zacks Rank #1 stock has a long-term earnings growth expectation of 12% and an Earnings ESP of +2.33%. You can see the complete list of today’s Zacks #1 Rank stocks here. The company is scheduled to report its results before the opening bell on Jul 24.

S&P Global Inc. (SPGI): Formerly known as McGraw-Hill Financial, S&P Global is the provider of financial information and 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 12.3%. S&P Global currently carries a Zacks Rank #2 along with an Earnings ESP of +2.58%. The company is slated to report its results before the market opens on Jul 27.

Moving Forward

As the second-quarter earnings picture promises to be quite encouraging driven by an improving 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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