In This Article:
Business services providers use their specialized expertise to help enterprises streamline operations and cut costs. But increasing competition from AI-driven upstarts has tempered enthusiasm, and over the past six months, the industry has pulled back by 2.4%. This drop was disappointing since the S&P 500 held its ground.
A cautious approach is imperative when dabbling in these companies as many are also sensitive to the ebbs and flows of the broader economy. Keeping that in mind, here are three services stocks that may face trouble.
Connection (CNXN)
Market Cap: $1.79 billion
Starting as a small computer products seller in 1982 and evolving into a Fortune 1000 company, Connection (NASDAQ:CNXN) is a technology solutions provider that helps businesses and government agencies design, purchase, implement, and manage their IT infrastructure and systems.
Why Do We Think CNXN Will Underperform?
-
Sales stagnated over the last five years and signal the need for new growth strategies
-
Earnings growth over the last five years fell short of the peer group average as its EPS only increased by 1% annually
-
Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 2.5% for the last five years
Connection’s stock price of $70.34 implies a valuation ratio of 20.2x forward P/E. Check out our free in-depth research report to learn more about why CNXN doesn’t pass our bar.
Equifax (EFX)
Market Cap: $34.17 billion
Holding detailed financial records on over 800 million consumers worldwide and dating back to 1899, Equifax (NYSE:EFX) is a global data analytics company that collects, analyzes, and sells consumer and business credit information to lenders, employers, and other businesses.
Why Does EFX Fall Short?
-
Day-to-day expenses have swelled relative to revenue over the last five years as its adjusted operating margin fell by 6.8 percentage points
-
Incremental sales over the last two years were less profitable as its 4% annual earnings per share growth lagged its revenue gains
-
ROIC of 10.6% reflects management’s challenges in identifying attractive investment opportunities, and its shrinking returns suggest its past profit sources are losing steam
Equifax is trading at $275.89 per share, or 34.7x forward P/E. To fully understand why you should be careful with EFX, check out our full research report (it’s free).
ManpowerGroup (MAN)
Market Cap: $2.01 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.