We are at the tail end of the first-quarter earnings season. The current reporting cycle is on track to record the strongest growth in the past seven years. Total earnings are expected to be up 23.6% on revenue growth of 8.8%, per the latest Earnings Outlook report. This is much higher than 13.4% earnings growth and 8.1% revenue growth recorded in Q4.
The bullish projection for the quarter have been attributed to factors like the corporate tax overhaul apart from an improving economy and a much-improved job market.
Per the report, 444 S&P 500 members have reported quarterly results. While 77.7% of these companies delivered positive earnings surprise, 75% beat top-line expectations. Earnings of these companies increased 24.5% from the year-ago quarter, while revenues rose 9.3%.
Business Services Performed Well
Given the prevalent healthy scenario, all the 16 Zacks sectors are projected to end the current reporting cycle with year-over-year earnings growth. Moreover, 13 are anticipated to display double-digit earnings growth.
S&P 500 members from the Business Services sector have already reported financial numbers and recorded top- and bottom-line growth of 22.5% and 6.8%, respectively in the first quarter of 2018.
The sector benefited from a strong U.S. economy, reduced tax rates, robust manufacturing and non-manufacturing activities, easing of the U.S. dollar and momentum in oil prices.
A Sneak Peek into the Driving Factors
Gross Domestic Product (GDP) grew at a seasonally adjusted annual rate of 2.3% in the first quarter of 2018, following 2.6% gain in the fourth quarter of 2018, per the “advance” estimate released by the Bureau of Economic Analysis.
The slowdown in growth was mainly due to seasonal quirk and economists expect growth to accelerate in the second quarter. Lower corporate and individual tax rates along with increased government spending are expected to push annual economic growth to the 3% target.
Economic activity in the manufacturing sector expanded in April and the overall economy grew for the 108th consecutive month. U.S. manufacturing activity continued its robust performance in April as the PMI measured by ISM touched 57.3%. This shows strong growth in manufacturing for the 20th consecutive month, driven by continued increase in new orders, production activity and employment and inventories. Of the 18 manufacturing industries, 17 reported growth in April.
The employment index grew 54.2% in April, which indicates employment growth for the 19th consecutive month. Of the 18 manufacturing industries, 12 reported employment growth. The increase came as companies are hiring more skilled workers and indirect personnel.
As far as the non-manufacturing sector is concerned, NMI was 56.8% in April, recording the 99th consecutive month of expansion. While the Prices Index gained 0.3% to 61.8%, Employment Index declined 3% to 536%. As many as 18 non-manufacturing industries reported growth.
Continuous increase in PMI, NMI and the number of jobs offered by manufacturing giants further boost optimism.
Given the bullish sentiment surrounding business services stocks, it will not be a bad idea to add companies that have the potential to report better-than-expected earnings this time around.
However, given the high degree of diversity in the sector, picking the right stocks for your portfolio might appear to be a colossal task. An easy way to narrow down the list is by choosing stocks that have a favorable Zacks Rank #1 (Strong Buy) or 2 (Buy) or 3 (Hold) and a positive Earnings ESP. This can be done with the help of the Zacks Stock Screener.
Earnings ESP is our proprietary methodology for determining the stocks that have the best chances to surprise with their next earnings announcement. 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.
Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%. Here are four business services stocks that match the abovementioned criteria and thus may emerge winners in this reporting cycle.
News and information provider Thomson Reuters Corp (NYSE:TRI) currently carries a Zacks Rank #2 and has an Earnings ESP of +7.36%. The company’s earnings surpassed the Zacks Consensus Estimate in all the previous four quarters, delivering an average positive earnings surprise of 14.3%.
Moreover, in the last 60 days, the Zacks Consensus Estimate for first-quarter 2018 earnings increased 11.5% to 58 cents per share. Full-year earnings estimates increased 7% to $2.28 per share in the same time frame. The company is slated to report quarterly results before the bell on May 11.
Management and technology consulting services provider Booz Allen Hamilton Holding Corporation (NYSE:BAH) is also a Zacks Rank #2 company. With an Earnings ESP of +4.74%, the company is poised to beat earnings estimates. The company surpassed earnings estimates in the trailing four quarters with an average beat of 8.4%
In the last 60 days, the Zacks Consensus Estimate for first-quarter 2018 earnings increased 2.3% to 45 cents per share. Full-year earnings estimates increased 0.5% to $1.94 per share in the same time frame. The company is slated to report quarterly results on May 29 before market opens.
Integrated financial information and analytical applications provider, FactSet Research Systems Inc. (NYSE:FDS) has an Earnings ESP of +0.23% and Zacks Rank #3 (Hold). The company’s earnings surpassed the Zacks Consensus Estimate in the last four quarters, with an average beat of 1.9%.
The Zacks Consensus Estimate for third-quarter fiscal 2018 earnings increased 1.4% to $2.14 per share. Full-year earnings estimates increased 1.3% to $8.48 per share in the same time frame. The company is expected to report quarterly results on Jun 26.
Payroll, human resource, retirement, and insurance services provider, Paychex, Inc. (NASDAQ:PAYX) surpassed the Zacks Consensus Estimate in each of the last four quarters, with an average beat of 1.7%. It has a Zacks Rank #3 and an Earnings ESP of +9.28%.
Over the last 60 days, the Zacks Consensus Estimate for third-quarter fiscal 2018 earnings remained unchanged at 61 cents per share. Full-year earnings estimates increased 1.6% to $2.49 per share in the same time frame. The company is expected to report quarterly results on Jun 27.
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