RBC sees ‘something for everyone’ in 2026 business services outlook

Investing.com -- RBC Capital Markets in a note dated Monday has turned more constructive on the pan-European business services sector heading into 2026, citing attractive valuations despite another year of underperformance and widespread earnings downgrades.

The sector underperformed major indices in 2025, falling 19% versus the FTSE100, 6% versus the FTSE250, and 12% versus MSCI Europe, according to the brokerage. 

However, the sector’s average one-year forward price-to-earnings ratio has fallen to 15.5 times from 17 times a year ago, below the long-run average of 16.5 times.

RBC now sees 22% average implied upside including dividends across its coverage universe, which it characterizes as historically high. The average 2026 estimated free cash flow yield stands at 6.1%, with a dividend yield of 3.4%.

The improved outlook prompted several rating changes. At the defensive end, RBC upgraded catering giant Compass Group to “outperform” from “sector perform” with a 2,775 pence price target, up from 2,700 pence, following its recent de-rating. 

The brokerage also double upgraded security services provider Securitas to “outperform” from “underperform” with a SEK170 target from SEK120, citing an inflection point in free cash flow and return on invested capital.

Conversely, RBC downgraded testing companies SGS and Bureau Veritas to “underperform” on concerns about global trade slowdown, cutting SGS’s target to CHF85 from CHF86.5 and Bureau Veritas to €26.5 from €28.5.

The sector endured significant pressure in 2025, with average earnings per share downgrades of 14% for 2026 estimates over the past 12 months. 

Only three stocks saw positive earnings momentum. Defensives outperformed cyclicals by 11%, while small and mid-cap stocks outperformed large cap by 17%, reversing last year’s trend.

RBC expects sector organic revenue growth to improve to 4.3% in 2026 from 2.4% in 2025, though this largely reflects easier comparatives rather than economic improvement. The weighted average GDP outlook is 1.5% for 2026, down from 1.7% in 2025.

The brokerage now maintains a more balanced spread of picks across defensive growth names like foodservice provider Aramark, specialty products distributor Diploma, Compass Group, Securitas and government services contractor Serco Group. 

At the cyclical end, RBC favors industrial distributor RS Group, staffing firms Adecco, PageGroup and Hays, workspace provider IWG, and components maker Essentra. Special situations picks include business process outsourcer Capita, distribution group DCC, pest control company Rentokil and building materials merchant Travis Perkins.

Balance sheets remain strong with average gearing at 1.4 times, providing scope for continued mergers and acquisitions and shareholder returns. Some 40% of coverage companies bought back stock over the past year.

RBC acknowledges that artificial intelligence implications remain unclear, noting Teleperformance’s valuation collapse as evidence of risks for perceived AI losers, though it sees AI as a near-term positive for productivity gains across most of the sector.