Business Services Thrive as Demand Surges in Q3 2024

The third quarter of 2024 saw strong demand for business services, driven by digital transformation, cost efficiency needs, increased adoption of flexible workforce solutions, and increased focus on compliance and regulatory adherence.

Providers of business services that embraced technology and responded to market demands for flexibility and sustainability emerged as the biggest winners. This quarter illustrated the sector’s ability to support companies during economic challenges while seizing growth opportunities in digital, regulatory, and sustainability areas.

According to the latest Earnings Trend report, the earnings of S&P 500 members in the business services sector that reported results this season increased by 5.2% year over year on a revenue growth of 4.9%. Notably, 81.3% of these companies exceeded earnings per share (EPS) estimates, while 72.9% surpassed sales projections.

Analysts anticipate that total quarterly earnings for the sector’s S&P 500 members will grow by 5.4% year over year, with revenues expected to rise by 6.5%.

Several key players in the sector, including Fiserv, Inc.FI, Booz Allen Hamilton Holding CorporationBAH, S&P Global Inc. and Automatic Data Processing, Inc.ADP, are positioned to exceed estimates in the continuing reporting cycle.

Let us examine the factors influencing the performance of business services companies in this quarter.

Robust Demand Fuels Growth in the Services Sector

With service activities improving, demand for business services increased throughout the quarter. By the end of Q3, the Services PMI, measured by the Institute for Supply Management, remained above the 50% threshold for the 49th time in 52 months.

Several sector-specific factors bolstered growth this quarter. These include the necessity of services like waste management, heightened demand for risk management and consulting, and a focus on increasing operational efficiency and digital transformation.

Particular services related to management and support, healthcare, finance, accommodation, food, transportation, and education remained strong during this period.

Companies Set to Surpass Expectations This Earnings Season

With numerous firms in the sector, identifying business services stocks likely to exceed earnings can be challenging. However, our knowledgeable approach helps clarify the options available.

Narrowing the list of prospects can be achieved by focusing on stocks with a positive Earnings ESP and a Zacks Rank of #1 (Strong Buy), #2 (Buy), or #3 (Hold).

The Earnings ESP evaluates how likely a stock might surprise investors in its next earnings announcement. It calculates the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate.

Our analysis indicates that stocks with this combination have up to a 70% chance of providing an earnings surprise.

Below are our suggested picks.

Fiserv: As a global provider of payments and financial services technology solutions, FI is set to report its third-quarter 2024 results on October 22. It holds an Earnings ESP of +0.18% and carries a Zacks Rank of #2.

The Zacks Consensus Estimate for Fiserv’s Q3 revenues is $4.91 billion, reflecting a 6.3% increase year over year. The consensus for earnings stands at $2.25 per share, indicating a 14.8% rise compared to the previous year.

The Zacks Consensus Estimate for S&P Global’s revenues in the upcoming quarter is $3.4 billion, suggesting a year-over-year growth of 10.1%. The earnings consensus is $3.54 per share which signifies a 10.3% increase compared to the same quarter last year.

The Zacks Consensus Estimate for Booz Allen’s Q2 revenues is pegged at $2.96 billion, marking a 10.9% increase from the previous year. The consensus for earnings stands at $1.48 per share, suggesting a rise of 14.7% from the previous year.

The Zacks Consensus Estimate for Automatic Data Processing’s revenues in the upcoming quarter stands at $4.76 billion, a 5.5% rise year over year. The consensus for earnings is $2.20 per share, indicating a 5.8% increase from the previous year.