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One analyst and top management from nine sector firms examine the Business Services sector in this 40-page Special Focus - Business Services Issue from The Wall Street Transcript available at (212/952-7433) or http://www.twst.com/info/info598.htm

TWST: Marta, what is your definition of this broad sector?

Ms. Nichols: We include in this sector, as many large institutional investors do, staffing, recruiting, and outsourcing but exclude technology-related services. Outsourcing can be very broadly defined as well, but within my coverage, outsourcing includes primarily outsourcers of human resource functions like payroll processing and benefits administration.

TWST: Are there any areas that demonstrate a higher growth potential than the others?

Ms. Nichols: Certainly, both within staffing and within the broader business services category. Just within staffing, some sectors continued to grow throughout the recession, like nursing and some other areas of healthcare staffing and they are still showing solid growth now. Companies with exposure to blue collar staffing have indicated some optimism recently and consensus estimates for some of those companies, such as Manpower (MAN), Labor Ready (LRW) and CDI Corp. (CDI), have actually risen for the first time in well over a year. Stepping outside of just staffing and recruiting and looking at the rest of business services, some outsourcing and specialty consulting companies have posted much better performance over the course of the last two years. The revenues of those companies have been flat to up (whereas most staffing companies are still experiencing double-digit revenue and earnings declines). So I would argue that specialty consulting companies, particularly those that have a subscription-based revenue stream or offer some kind of “must-have service,” will continue to perform much better financially than the staffing and recruiting companies over the next 12 months. Within that category I cover Corporate Executive Board (EXBD), Hewitt Associates (NYSE:HEW) and Watson Wyatt (WW).

TWST: Are there any business models that have proven more resilient than others?

Ms. Nichols: Those of the companies that I just mentioned certainly fit that criterion — that is, those that offer a service that has minimal exposure to cyclical pressure, giving them revenue and earnings visibility. Watson Wyatt and Hewitt Associates are good examples of companies that provide what I call “must-have” services, or services that corporate clients require year-in and year-out and can’t cut in tough economic times, like HR outsourcing and pension valuation. Because those companies have limited exposure to discretionary spending or employment cycles, their financials and stock prices have held up very well.

TWST: Marta, what are you anticipating for this group for the next six to 12 months?

Ms. Nichols: As I said earlier, for much of this year, these stocks were outperforming the market and other services and technology sectors, but have recently given back much of those gains. Many stocks in this group still look expensive to me, but unless we see a significant improvement in the fundamentals of other technology- and services-related companies, business services will probably continue to modestly outperform other services companies and may continue to do slightly better than the market. For this sector to dramatically underperform, you need either very attractive investment alternatives in other growth sectors, such as technology, or a significant negative surprise from these companies, neither of which has a high probability near term.

1) Business Services & Outsourcing Stocks - In an in-depth (3,600 words) Analyst Interview, Marta K. Nichols, a Principal and Senior Research Analyst at Banc of America Securities LLC, examines the outlook for the sector and shares specific stock recommendations.

2) CEO interviews (average 2,500 words). Top management of Nine sector firms examine the outlook for their firm and the sector.