Business Service Firms Are Set to Profit
Phillip is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
With employment rising throughout the United States, business service firms are set to increase profits in the years ahead. The economic recovery also means businesses have more disposable income with which to optimize company performance. These are three of the top firms that will be contacted to reap the benefits of more company spending power.
Insperity is set to profit from ObamaCare
Insperity (NYSE: NSP) must be happy about Obamacare, as the firm looks to help companies make sense of the health policy that will be more fully rolled out at the beginning of next year. The company provides business solutions for benefits, workers' compensation, training, payroll and employee management. I expect the number of businesses coming to Insperity for advice will steadily increase throughout this year and next.
Despite this, analysts believe the company's EPS will retract by 7% this year, and grow 18% next year. However, I believe the benefits of the ObamaCare reform will come this year, as businesses prepare prior to the changes, rather than during.
I further disagree with this year's analyst estimates because the company has only begun to capture the overall business advisory market. Insperity expects a 3.5% per year increase in employees under its professional employer organization. That would put the firm up to 130,000 employees per month. The company focuses on firms with between 10 and 100 employees. That represents 28 million employees in the United States, and a mountain of potential growth for the company, given its current small client base in comparison to the potential.
G&K is ready to dress returning and new workers
G&K Services (NASDAQ: GK) makes money when Americans are employed. That's why the last few years has been a struggle for the firm. But with employment numbers on the rebound (see chart), the company is ready to make serious gains. After all, G&K is a leading supplier of work clothes. As the chart shows, revenue gains at G&K is almost synchronized with the unemployment rate recovery.
Analysts also believe the firm will experience continued success along with the employment recovery. They expect a 28% increase to EPS this year, and a further surge of 10% next year. I expect full employment to be reached in the next three years, and at that point G&K's revenue will likely stabilize.
I believe the consensus prediction for revenue is way off, however. Analysts predict a 4.6% increase this year, and another 4.7% next year. But as the chart indicates, revenue is already growing at about 8%. A decrease in that rate would likely mean a reduction in the employment recovery, and I don't see that happening soon.
Advisory Board has a strong economic moat
Advisory Board (NASDAQ: ABCO) provides companies with best practices research. As firms have more disposable money with which to work, in light of the economic recovery, I see this stock doing well. Furthermore, Advisory Board could also benefit from the onslaught of Obamacare.
Analysts expect sales growth of about 15.5% in each of the next two years. EPS is only expected to rise by 4% this year before posting major gains next year in a 23.5% run. The low forecast for this year's revenue could be due to the company's narrow focus on the health care field.
However, the firm is likely to maintain its current market share, and potentially grow it if the company is contacted for Obamacare-related information. The library that the Advisory Board already has makes it difficult for competitors to enter the market, and that means clients will continue to come back. In fact, about 90% do.
Where to put your money
While these firms are among the most likely to benefit from the economic recovery, I see one as standing out over the others. G&K is certainly the most predictable stock to own, and the most easily understood. This gives me comfort investing in the firm, whose revenue will likely move opposite to a decreasing employment rate. This is the type of stock that can provide the backbone of a portfolio.
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