Business Services Stock Outlook - October 2016

The business services sector provides ancillary services to the other players in the market. Hence, the core business of one company in this sector can be a business service for another. Importantly, this dynamism opens the door to many business services companies.

Notably, business service accounts for a major portion of a country’s gross domestic product (GDP) with the gradual shift in the global economy having moved from agriculture to industry to now business services. The sector, therefore, plays a major role in a country’s overall development.

The intensely competitive business services sector must rigorously work toward controlling costs and generating higher revenues so that its profitability does not suffer. A focus on functions and activities close to its core competence is a prerequisite in reaping the benefits of economies of scale, besides improving competitive positioning.

The fortunes of business service operators are closely tied to the health of the broader economy. As per the U.S. Bureau of Economic Analysis (BEA), domestic economy has been expanding (at a rate of 0.8% in the first quarter of 2016 and 1.4% in the second quarter) on higher contribution from personal consumption expenditures and increased residential fixed investment. The growth momentum is now expected to accelerate by 1.5% in 2016 and 2.5% in 2017.

This improving outlook for the U.S. economy is therefore a net positive for the sector. Though the bureau presently estimates total industrial production to decline 1% in 2016, the same is expected to be on the growth trajectory in 2017, with an estimated increase of 1.4%, thus offering opportunities of growth and expansion to business service providers. Moreover, a projected rise in expenditure should lend support to the business service sector.

Economic sensitivity aside, business service companies are quite conservatively managed, with a large number of players sharing their excess cash with shareholders through dividends and share buybacks.

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