Business services providers play a critical role for enterprises, assisting them with everything from new hardware integrations to consulting and marketing. But cutbacks in corporate spending and the threat of new AI products have kept sentiment in check, and over the past six months, the industry has tumbled by 1.1%. This performance was disheartening since the S&P 500 held steady.
Investors should tread carefully as many of these companies are also cyclical, and any misstep can have you catching a falling knife. With that said, here are three services stocks best left ignored.
NV5 Global (NVEE)
Market Cap: $1.27 billion
Operating from over 100 locations across the U.S. and internationally, NV5 Global (NASDAQ: NVEE) provides engineering, environmental, geospatial, and technical consulting services to public and private sector clients for infrastructure and building projects.
Why Are We Cautious About NVEE?
- Expenses have increased as a percentage of revenue over the last four years as its adjusted operating margin fell by 5.1 percentage points
- Performance over the past two years shows its incremental sales were much less profitable, as its earnings per share fell by 4.9% annually
- Capital intensity has ramped up over the last four years as its free cash flow margin decreased by 8.3 percentage points
At $19.45 per share, NV5 Global trades at 16x forward price-to-earnings. If you’re considering NVEE for your portfolio, see our FREE research report to learn more.
SS&C (SSNC)
Market Cap: $20.53 billion
Founded in 1986 as a bridge between technology and financial services, SS&C Technologies (NASDAQ: SSNC) provides software and software-enabled services that help financial firms and healthcare organizations automate complex business processes.
Why Is SSNC Not Exciting?
- Average billings growth of 4.5% over the past two years was subpar, suggesting it struggled to push its products and might have to lower prices to stimulate demand
- Free cash flow margin shrank by 3.8 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
- Low returns on capital reflect management’s struggle to allocate funds effectively
SS&C is trading at $85.91 per share, or 14.5x forward price-to-earnings. Check out our free in-depth research report to learn more about why SSNC doesn’t pass our bar.
ManpowerGroup (MAN)
Market Cap: $2.70 billion
Founded during the post-World War II economic boom when businesses needed temporary workers, ManpowerGroup (NYSE: MAN) connects millions of people to employment opportunities through its global network of staffing, recruitment, and workforce management services.
Why Is MAN Risky?
- Organic revenue growth fell short of our benchmarks over the past two years and implies it may need to improve its products, pricing, or go-to-market strategy
- Sales are expected to decline once again over the next 12 months as it continues working through a challenging demand environment
- Performance over the past five years shows each sale was less profitable as its earnings per share dropped by 10% annually, worse than its revenue
ManpowerGroup’s stock price of $57.82 implies a valuation ratio of 12.3x forward price-to-earnings. To fully understand why you should be careful with MAN, check out our full research report (it’s free).
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