Business services providers use their specialized expertise to help enterprises streamline operations and cut costs. These firms have helped their customers unlock huge efficiencies, so it’s no surprise the industry has posted a 9.6% gain over the past six months, nearly mirrorring the S&P 500.
Although these companies have produced results, only a handful will thrive over the long term as AI-driven upstarts are rapidly taking share from the incumbents. With that said, here are three services stocks that may face trouble.
Knowles (KN)
Market Cap: $3.13 billion
With roots dating back to 1946 and a focus on components that must perform flawlessly in critical situations, Knowles (NYSE: KN) designs and manufactures specialized electronic components like high-performance capacitors, microphones, and speakers for medical technology, defense, and industrial applications.
Why Should You Sell KN?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 5.2% annually over the last five years
- Subscale operations are evident in its revenue base of $614.1 million, meaning it has fewer distribution channels than its larger rivals
- Earnings growth underperformed the sector average over the last five years as its EPS grew by just 5.2% annually
Knowles’s stock price of $36.65 implies a valuation ratio of 25.8x forward P/E. Check out our free in-depth research report to learn more about why KN doesn’t pass our bar.
DXC (DXC)
Market Cap: $1.34 billion
Born from the 2017 merger of Computer Sciences Corporation and HP Enterprise's services business, DXC Technology (NYSE: DXC) is a global IT services company that helps businesses transform their technology infrastructure, applications, and operations.
Why Is DXC Risky?
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- Sales are expected to decline once again over the next 12 months as it continues working through a challenging demand environment
- Low returns on capital reflect management’s struggle to allocate funds effectively
DXC is trading at $8.31 per share, or 3.4x forward P/E. Read our free research report to see why you should think twice about including DXC in your portfolio.
Insight Enterprises (NSIT)
Market Cap: $2.64 billion
With over 35 years of IT expertise and partnerships with more than 8,000 technology providers, Insight Enterprises (NASDAQ: NSIT) provides end-to-end digital transformation solutions that help businesses modernize their IT infrastructure and maximize the value of technology.
Why Do We Steer Clear of NSIT?
- Products and services are facing end-market challenges during this cycle, as seen in its flat sales over the last five years
- Estimated sales growth of 1.7% 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 2.1% annually
At $88.75 per share, Insight Enterprises trades at 7.5x forward P/E. Dive into our free research report to see why there are better opportunities than NSIT.
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