U.S. Business Services H2:26 Outlook: After defensive assets lag, the waste segment’s risk-reward turned positive, and distribution and service companies became more differentiated

Overview

This report is Bernstein's mid-year update and H2:26 outlook for the U.S. business-services names it covers, focusing on sub-industries such as waste, industrial distribution, uniform services, and pest control. The core view is that traditional U.S. business-services stocks underperformed in the first half despite strong overall industrials, mainly because market flows rotated toward higher-beta cyclical assets that benefited from data-center exposure and PMI-sensitive industrials; aside from Rollins, most companies’ fundamental outlooks have not materially deteriorated. In the second half, the waste sector appears more attractive due to CPI-linked pricing, recycling commodity prices, improving PMI, and relatively low valuation; industrial distribution benefits from non-residential and data-center construction, but weak residential building activity continues to weigh on Ferguson; near-term catalysts for Cintas and Rollins center on M&A approval, incremental margin expansion, and the quality of Q2:26 organic growth.

Core views

The report is most constructive on risk-reward recovery in the waste segment, arguing that WM, WCN, and RSG fundamental improvements have not yet been fully reflected in valuation, and that an FY2026 guidance upgrade in Q2:26 is reasonable for RSG and WCN. In industrial distribution, Grainger's strength comes from the catch-up off a 2025 relative lag, better-than-expected Q1:26 results, and pricing execution, though managements worry the market may be over-extrapolating long-term margin improvement; Fastenal faces risks from brand-product pricing, customer negotiations, and CEO transition; Ferguson is pressured by weakening residential construction, but market may be underestimating its data-center and non-residential exposure. Cintas' fundamentals are healthy but suppressed by UniFirst transaction uncertainty, and the 35-38% incremental margin target in FYQ4:26 is a key validation point. Rollins has been the worst performer year-to-date, with weather, pressure from lower-end consumers, departure of former CFO Ken Krause, and reduced credibility of its mid-term margin roadmap jointly depressing valuation.

Analysis framework

The report uses a top-down and bottom-up combination: it first compares year-to-date relative performance versus the S&P 500 and XLI, and EPS/EBITDA estimate revisions for coverage stocks, then uses CPI, PMI, residential starts, existing home sales, non-residential construction data, recycling commodity prices, and company events to explain sub-industry fundamental changes, and finally combines ratings, price targets, valuation multiples, and near-term catalysts to assess H2:26 risk-reward.

Methodology notes

• Relative Performance and ValuationStock Performance, Estimate Revisions, and Relative Multiple Comparison

  Differentiate between style rotation and fundamental deterioration by using year-to-date relative performance, EBITDA/EPS estimate revisions, and EV/NTM EBITDA and P/FCF relative valuation.

  The report notes that waste, Cintas, and Rollins have lagged, but estimate revisions for waste and Cintas are broadly stable, so the underperformance appears more from preference shifts than fundamental weakness; waste relative to the S&P 500 trades near a ten-year trough, supporting improved risk-reward.

• Macro and Pricing Pass-ThroughCPI-Lagged Pricing and PMI Cycle Indicators

  Waste contracts often use 12-month average CPI and adjust prices with roughly a 6-month lag; PMI staying above 50 generally points to improving industrial activity.

  Fed 2026 headline CPI expectations rising from 2.6% to 3.5%, together with PMI staying above 50 for five consecutive months, support FY2027 waste pricing upgrades and H2:26 industrial volume recovery.

• Company Events and Execution RiskRegulatory Review, Management Succession, and Margin Roadmap Validation

  Assess near- to mid-term stock-specific uncertainty using M&A approval timing, management changes, pricing execution, and incremental margin targets.

  The Cintas/UniFirst transaction could be delayed to H1:27 due to the FTC Second Request; Fastenal faces CEO succession and pricing execution risks; Rollins' former CFO departure weakens the credibility of its mid-term margin roadmap.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Waste Management (WM)

  Core waste coverage company, rated Outperform, PT $260.

  Strengths

  Fundamentals are stable; automation investment in recycling is driving margin improvement, and FY2026 projected recycling EBITDA margin improvement is 300 bps.

  Weaknesses

  Improvements in recycling commodity prices have been partially included in the FY2026 guide, so the probability of an upward guide revision is lower than for WCN and RSG.

  Comparison

  Compared with RSG, it is one of the better-performing companies in waste coverage year-to-date; relative to WCN, it is less affected by Chiquita Canyon-specific issues.

  Risks

  Residential volume remains negative, Q2:26 year-over-year comparisons are influenced by prior-year wildfire and hurricane cleanup gains, and valuation is sensitive to preference for defensive industrial styles.

• Waste Connections (WCN)

  Waste coverage company, rated Outperform, PT $205.

  Strengths

  Rising recycling commodity prices create upside to FY2026 guide revisions; sectoral fundamental improvement and relatively low relative valuation provide support.

  Weaknesses

  It has underperformed WM and RSG by about 7% year-to-date, mainly due to concerns around the Chiquita Canyon landfill.

  Comparison

  Relative to WM, the report sees WCN as more likely to benefit from recycling commodity price recovery not fully included in guidance.

  Risks

  Issues at the Chiquita Canyon landfill, weak residential demand, and industry competition pressure could continue to weigh on valuation.

• Republic Services (RSG)

  Waste coverage company, rated Market-Perform, PT $220.

  Strengths

  Rising recycling commodity prices and the Polymer Center can partly offset pricing weakness, and there is potential for an FY2026 guide revision in Q2:26.

  Weaknesses

  Residential environmental competition is intense, and management acknowledged that some competitors are willing to work for very low returns.

  Comparison

  Relative performance is close to WM year-to-date and it is one of the better performers in waste coverage; compared with WCN, it is less affected by a single landfill-event risk.

  Risks

  Persistent residential volume contraction, challenging Q2:26 year-on-year comparisons, and stronger-than-expected industry competitive intensity.

• Ferguson (FERG)

  Industrial distribution coverage company, rated Outperform, PT $310.

  Strengths

  Ranks first or second in the 75% market cohort, with roughly 20% share in commercial pipe and about 5% in commercial HVAC, making it the largest data-center construction beneficiary in coverage.

  Weaknesses

  Residential construction activity has weakened significantly; May residential starts fell to about 1.2m SAAR, which has reduced confidence in its guidance.

  Comparison

  Up only 3% year-to-date, it clearly trails Grainger and Fastenal; the report believes its data-center exposure is relatively underappreciated.

  Risks

  Sustained weakness in residential demand, mortgage rate and affordability pressure, and investor preference for other data-center distribution proxies such as Wesco.

• W. W. Grainger (GWW)

  Industrial distribution coverage company, rated Market-Perform, PT $1,250.

  Strengths

  Beat and raised guidance in Q1:26, with strong pricing execution, and was not exposed to the brand-product pricing pressure Fastenal faced.

  Weaknesses

  The report worries the market is over-extrapolating the margin improvement trend from 2020-2023, so long-term gross margins could come under pressure again.

  Comparison

  Up 33% year-to-date, making it the best-performing distributor in the coverage set.

  Risks

  Overly high margin expectations, supply-chain pressure, and pre-buying effects from conflict involving Iran that could affect sustainability of later growth.

• Fastenal (FAST)

  Industrial distribution coverage company, rated Underperform, PT $42.

  Strengths

  Digital penetration and a large-customer strategy still provide structural advantages; shares are up 21% year-to-date.

  Weaknesses

  Brand-product pricing visibility is limited, customer negotiations have been slower than expected, and Q1:26 results missed consensus.

  Comparison

  Compared with Grainger, pricing execution and management transition uncertainty are higher.

  Risks

  July CEO transition, speed of restoring pricing discipline, and gross margin consensus expectations in the post-tariff pricing environment.

• Cintas (CTAS)

  Uniform and facility services company, rated Market-Perform, PT $200.

  Strengths

  Fundamentals are healthy, and if FYQ4:26 incremental margin rises to 35%-38%, it would validate that prior margin weakness was mainly an investment-timing issue.

  Weaknesses

  The UniFirst transaction remains in an approval-uncertainty phase, and the FTC Second Request may delay approval until H1:27.

  Comparison

  Down about 4% year-to-date, it may remain in ‘deal purgatory’ until transaction approval is resolved.

  Risks

  FTC challenge, approval delay into 2027, deal economics deteriorating due to oversized required divestitures, and margin recovery falling short of guidance.

• Rollins (ROL)

  Pest control company, rated Market-Perform, PT $52.

  Strengths

  Q2:26 is the first clean read of organic growth since Q3:25; warmer spring weather benefits pest-control demand.

  Weaknesses

  Year-to-date it is the worst performer in coverage, affected by weather volatility, lower-end consumer pressure, resignation of former CFO Ken Krause, and reduced credibility of the mid-term margin roadmap.

  Comparison

  Relative to Cintas and other higher-quality growth business-services names, Rollins faces compounding valuation compression from both a de-rating in the sector and company-specific execution risk.

  Risks

  Organic growth below expectations, new CFO failing to execute the mid-term margin roadmap, continued weakness in low-end consumer demand, and changes in non-compete enforcement affecting employee retention.

Key data

• Traditional U.S. Business Services Relative PerformanceWaste coverage underperformed the S&P 500 by about 8%, Cintas by about 13%, and Rollins by about 37%.The report attributes most of the lag to rotation within industrials toward higher-beta and cyclical stocks.
• Waste Industry PricingFed 2026 headline CPI expectation rose from 2.6% to 3.5%.Many waste contracts use 12-month average CPI with a 6-month lag in price resets, and the report believes FY2027 pricing expectations may need a modest upward revision.
• Industrial Volume IndicatorsPMI has been above 50 for five consecutive months.The report sees this as providing upside for H2:26 industrial waste volume and industrial distribution demand.
• Residential Demand PressureU.S. residential starts in May 2026 fell 15% month-on-month to about 1.2m SAAR, the lowest since May 2020.This factor pressures waste residential volume and Ferguson's residential-related business.
• Industrial Distribution Stocks YTD PerformanceGrainger +33%, Fastenal +21%, Ferguson +3%.The divergence stems from non-residential and data-center exposure, residential demand drag, and company-level pricing execution.
• Cintas Transaction ApprovalFTC issued a Second Request on June 11, 2026; approval may be delayed to H1:27.The report believes the market is assigning a 75%-80% approval probability, above the 40%-75% range cited by antitrust experts.
• Cintas Margin ValidationManagement guided FYQ4:26 incremental margin to 35%-38%.Trailing twelve-month incremental margins around 27% mean the next quarter will test whether prior margin weakness was temporary or structural.
• Rollins Operating and Governance RisksQ2:26 is the first clean read of organic growth since Q3:25; former CFO Ken Krause resigned.Warmer weather is a short-term tailwind, but the CFO departure lowers credibility on mid-term margin roadmap execution.

Impact & implications

For portfolio positioning, the report implies that in H2:26 investors can re-emphasize waste companies with stable fundamentals and relatively compressed valuation, especially RSG, WCN, and WM where pricing upgrades, recycling commodity upside, and potential guidance revisions are still possible. Industrial distribution should be split by non-residential and data-center exposure versus residential drag: Ferguson may offer upside if its data-center exposure is underappreciated, while FAST and GWW face risks around pricing and gross margin expectations. CTAS and ROL are more event-driven and execution-dependent: CTAS depends on the UniFirst transaction path and margin recovery, while ROL depends on Q2:26 organic growth, continued weakness in lower-end consumer demand, and whether new management can execute a margin expansion plan.

Risks

• Residential demand is weaker than expected, keeping pressure on waste residential volume, Ferguson's residential-related business, and certain service demand.
• CPI declines or weaker-than-expected pricing pass-through, weakening the waste FY2027 pricing upgrade case.
• PMI falls back below 50 or industrial activity slows, weakening industrial volume recovery and industrial distribution demand.
• Recycling commodity prices, including OCC, plastic, or D3 RIN, retreat and reduce the probability of waste companies upgrading guidance.
• The Cintas/UniFirst transaction is challenged by the FTC or materially delayed, weighing on CTAS valuation and management attention.
• Management transitions, pricing execution, or under-delivery on margin roadmaps at Fastenal and Rollins do not materialize as expected.
• The market continues to prefer higher-beta and data-center-related assets, delaying valuation recovery of defensive business-services names.

What to watch

• RSG, WCN, and WM Q2:26 results and whether they raise FY2026 guidance.
• Trends in waste industry residential, commercial, and industrial volume by segment, especially whether H2:26 residential negative growth starts to improve.
• The impact of Fed CPI expectations, actual CPI, and waste contract price pass-through on FY2027 consensus.
• Price movements in recycling and renewable fuel-related inputs, including OCC, plastics, and D3 RIN.
• Whether PMI stays above 50 and whether non-residential and data-center construction indicators remain strong.
• The net impact of Ferguson's data-center-related orders and residential demand pressure.
• Pricing execution and customer negotiation progress after Fastenal’s new CEO Jeff Watts takes office.
• Whether Cintas FYQ4:26 incremental margin reaches 35%-38%, and subsequent FTC actions on the UniFirst transaction.
• Rollins Q2:26 organic growth, weather impact, and new CFO execution signals for the margin roadmap.