3 Business Services Stocks to Buy in Resurging Q1 Earnings

The U.S. economy is expected to grow a paltry 1.4% in first-quarter 2017 according to the conservative estimates by the Wall Street Journal, down from 2.1% in fourth-quarter 2016. Yet, the overall economic sentiment remains fairly bullish buoyed by some of the sweeping policy changes proposed by President Donald Trump, which are likely to take effect in the subsequent 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 U.S. GDP to grow at an annualized rate of 2.3% in 2017 and 2.5% in 2018 as Trump’s policies take center stage.

Economic Growth Momentum

The U.S. manufacturing activity continued its robust performance in March as the manufacturing index measured by the Institute for Supply Management recorded 57.2%, indicating growth for the seventh consecutive month. This also serves as a precursor to the solid economic growth expected in the near future.

On an average, there were 178,000 job additions per month in the first quarter. The unemployment rate rose marginally to 4.5% in March due to higher participation rate of 63% 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 125.6 in March from 116.1 in February – the highest level reached since Dec 2000 – signifying optimism about the U.S. economy.

As the companies take stock of the situation and deliberate on their future course of action, let us take a glimpse into how the first-quarter earnings season is shaping up so far for the business services sector.

Business Services Sector Performance

About 52.2% of the total S&P 500 companies in the Business Services sector reported their earnings results through Apr 26, 2017. With a ‘beat ratio’ of 10.0%, total earnings for these companies are up 66.7% year over year. Revenues increased 2.1% from the year-ago period, with a ‘beat ratio’ of 50.0%.

The entire Business Services sector is expected to perform slightly lower than the overall index. The earnings growth expectation for the sector is 8.0% versus 9.7% for the S&P 500 index. (Read: Q1 Earnings Season Shows Broad-based Momentum)

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 this arena, picking the right stock for your portfolio could appear to be a colossal task. An easy way to narrow the list is to look at 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.

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 in first-quarter earnings.

Thomson Reuters Corporation (TRI): Based in Toronto, Canada, Thomson Reuters offers news and information for professional markets across the globe. With operations in over 100 countries, the company has a wide array of products and services for the financial community, federal workforce, legal experts and corporate organizations for informed decision-making process.

Thomson Reuters has a long-term earnings growth expectation of 8.3%. The company currently has an Earnings ESP of +3.77% and carries a Zacks Rank #2. 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 Apr 28.

Everi Holdings Inc. (EVRI): Headquartered in Las Vegas, NV, Everi provides video and mechanical reel gaming content and technology solutions, integrated gaming payment solutions, and compliance and efficiency software solutions.

This Zacks Rank #2 stock has a long-term earnings growth expectation of 20% and an Earnings ESP of +42.86%. The company is scheduled to report its results after the closing bell on May 9.

The Western Union Company (WU): Headquartered in Englewood, CO, Western Union offers fast, reliable and convenient ways to transfer money across the globe. The company was formed as a result of a spin-off from First Data Corporation on Sep 29, 2006.

The company has a long-term earnings growth expectation of 7.1%. Western Union currently carries a Zacks Rank #3 along with an Earnings ESP of +2.56%. The company is slated to report its results after the closing bell on May 2.

Moving Forward

As the U.S. stocks aim to seek newer pastures with 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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