Business services providers thrive by solving complex operational challenges for their clients, allowing them to focus on their secret sauce. Furthermore, the demand for their offerings is rising as more clients outsource non-core functions, a trend that has enabled the industry to return 14.3% over the past six months. At the same time, the S&P 500 was up 9.8%.
Regardless of these results, investors must exercise caution as many companies in this space are sensitive to the ebbs and flows of the broader economy. Taking that into account, here is one services stock poised to generate sustainable market-beating returns and two best left ignored.
Two Business Services Stocks to Sell:
IBM (IBM)
Market Cap: $239.9 billion
With a corporate history spanning over a century and once known for its iconic mainframe computers, IBM (NYSE: IBM) provides hybrid cloud computing platforms, AI solutions, consulting services, and enterprise infrastructure to help businesses modernize their operations.
Why Does IBM Give Us Pause?
- Annual sales growth of 4.5% over the last five years lagged behind its business services peers as its large revenue base made it difficult to generate incremental demand
- Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 4.8%
- Earnings growth underperformed the sector average over the last five years as its EPS grew by just 6.7% annually
At $256.25 per share, IBM trades at 19.9x forward P/E. To fully understand why you should be careful with IBM, check out our full research report (it’s free).
Amdocs (DOX)
Market Cap: $6.51 billion
Powering the digital experiences of approximately 400 communications companies worldwide, Amdocs (NASDAQ: DOX) provides software and services that help telecommunications and media companies manage customer relationships, monetize services, and automate network operations.
Why Is DOX Not Exciting?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 3.6% annually over the last two years
- Estimated sales growth of 3.1% for the next 12 months is soft and implies weaker demand
- Earnings per share lagged its peers over the last two years as they only grew by 8.1% annually
Amdocs’s stock price of $62.35 implies a valuation ratio of 8x forward P/E. If you’re considering DOX for your portfolio, see our FREE research report to learn more.
One Business Services Stock to Watch:
Interface (TILE)
Market Cap: $1.72 billion
Pioneering carbon-neutral flooring since its founding in 1973, Interface (NASDAQ: TILE) is a global manufacturer of modular carpet tiles, luxury vinyl tile (LVT), and rubber flooring that specializes in carbon-neutral and sustainable flooring solutions.
Why Are We Positive on TILE?
- Incremental sales over the last two years have been highly profitable as its earnings per share increased by 33.7% annually, topping its revenue gains
- Free cash flow margin expanded by 7.2 percentage points over the last five years, providing additional flexibility for investments and share buybacks/dividends
- Rising returns on capital show management is finding more attractive investment opportunities
Interface is trading at $29.72 per share, or 1.2x trailing 12-month price-to-sales. Is now the right time to buy? See for yourself in our comprehensive research report, it’s free.
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