3 Business Services Stocks to Consider Amid Industry Woes – June 5, 2024

3 Business Services Stocks to Consider Amid Industry Woes – June 5, 2024

The Business – Services space is a major beneficiary of the broader economy and manufacturing and non-manufacturing (service) activities. While service activities are currently in good shape, their positive impacts on the industry are being partially offset by contracting economic activity in the manufacturing sector.

Prudent growth strategies, innovation and technology enhancements are helping Affirm Holdings, Inc. (AFRM Free Report) , Mitie Group plc (MITFY Free Report) and SPAR Group (SGRP Free Report) to sail through challenges.

About the Industry

The Zacks Business-Services industry comprises companies that offer a range of services, including specialty rental, supply-chain management, electronic commerce, technology, document management, digital audience, data, voice, analytical and business transformation, among others. The pandemic has changed the way industry players conduct business and deliver services. The industry’s key focus is currently on channelizing money and efforts toward more effective operational components, such as technology, digital transformation, data-driven decision-making and enhanced cybersecurity. To position themselves suitably in the post-pandemic era and better utilize the opportunities that the economic recovery will bring, service providers are increasing their efforts toward formulating and reassessing strategic initiatives and targeting end markets.

What’s Shaping the Future of the Business Services Industry?

Demand Stability: The industry is mature, with demand for services in good shape for a while now. Revenues, income and cash flows are anticipated to gradually reach the pre-pandemic levels, aiding most industry players to pay out stable dividends.

Relaxed Immigration Restrictions: Higher talent costs due to a competitive talent market have been a headwind for the industry. However, growing immigration is helping service providers thrive with the increased flow of foreign talent.

Certain Headwinds to Continue: With continued uncertainty in the economy, the industry is expected to see pricing, staffing and labor cost increases and supply chain issues.

Zacks Industry Rank Indicates Dull Near-Term Prospects

The Business-Services industry is housed within the broader Business Services sector. It carries a Zacks Industry Rank #171, which places it in the bottom 31% of more than 245 Zacks industries.

The group’s Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates underperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than two to one.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and current valuation.

Industry’s Price Performance

The Zacks Business Services industry has underperformed the broader sector and the S&P 500 in the past 12-month period.

The industry has declined 7.9% against the S&P 500 composite’s growth of 23.5% and the broader sector’s rise of 15.4%.

One-Year Price Performance

3 Business Services Stocks to Consider Amid Industry Woes – June 5, 2024

Industry’s Current Valuation

On the basis of the forward 12-month price-to-earnings (P/E) ratio, which is commonly used for valuing business-services stocks, the industry is currently trading at 18.32X compared with the S&P 500’s 20.9X and the sector’s 25.53X.

Over the past five years, the industry has traded as high as 52.57X and as low as 10.04X, with the median being 23.41X, as the charts below show.

Price to Forward 12-Month P/E Ratio

3 Service Stocks to Bet On

We have presented three stocks that are well poised to grow in the near term.

Affirm Holdings: This operator of a platform for digital and mobile-first commerce is currently riding on growth in active merchant base and consumers, average transactions per consumer, and increased card activity through Affirm Card and single-use virtual debit cards.

Increase in the volume of interest-bearing loans, recent pricing initiatives, increase in loan sales volume and servicing fee revenues are helping the company keep its top line in good shape. Expense management and a healthy top line have helped in improving the operating margin.

AFRM currently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for fiscal 2024 bottom line has increased 19.2% in the past 60 days. AFRMshares have gained 90.5% in the past year. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

SPAR Group: This merchandising and brand marketing services provider’s topline is currently benefiting from strength in the U.S. remodel business and Canada business.

The company has a continued focus on streamlining its operating and financial structure while boosting the core business of merchandising, brand marketing, store transformation and fulfillment services.

SGRP currently carries a Zacks Rank #2. The Zacks Consensus Estimate for 2024 bottom line has increased more than 100% in the past 60 days. SGRP shares have gained 117.7% in the past year.

Mitie Group: The U.K.’s leading facilities management company has a significantly higher market share than its next largest competitor. The company operates in a highly fragmented market and has a devoted blue-chip customer base across public and private sectors, benefiting from diverse service offerings.

MITFY currently carries a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for fiscal 2025 EPS has remained unchanged at 57 cents in the past 60 days. Mitie’sshares have gained 33.9% in the past year.