US Business Services: Mid-Year Update and Outlook for H2:26
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Bernstein notes that traditional US business services stocks lagged the broader market in the first half of 2026. The waste sector underperformed the S&P 500 by 8%, Cintas by 13%, and Rollins by 37%. The firm attributes this divergence to market rotation into high-beta, cyclical sectors rather than fundamental deterioration, as EBITDA revisions for waste and Cintas remained flat year-to-date.
Looking forward, the waste industry presents improving pricing dynamics. With the Federal Reserve's 2026 CPI expectation rising to 3.5%, analysts estimate that fiscal 2027 pricing estimates need upward revision. Recovered commodity prices, such as OCC and plastics, have increased, and D3 RIN prices rose 23% year-over-year. Although residential volumes remain a persistent headwind with intense competition, industrial production offers short-term upside as the PMI has stayed above 50 for five consecutive months. Waste companies may raise their fiscal 2026 guidance during second-quarter earnings.
Performance among industrial distributors diverged significantly. Grainger surged 33% driven by strong execution, Fastenal gained 21%, and Ferguson rose just 3% due to weak residential construction. Meanwhile, Cintas faces regulatory delays, with the FTC issuing a second request that could push transaction approval to the first half of 2027.
Bernstein finds waste sector valuations at decade lows, offering a favorable risk-reward profile. Top picks include Waste Management with an Outperform rating and a $260 target, Waste Connections at $205, and Ferguson at $310.
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