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, limiting the industry’s gains to 19.5% over the past six months. This return lagged the S&P 500’s 21.3% climb.
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 we’re passing on.
DXC (DXC)
Market Cap: $2.40 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?
- Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
- Earnings per share were flat over the last five years and fell short of the peer group average
- ROIC of 1.2% reflects management’s challenges in identifying attractive investment opportunities, and its decreasing returns suggest its historical profit centers are aging
DXC is trading at $13.81 per share, or 4.5x forward P/E. Check out our free in-depth research report to learn more about why DXC doesn’t pass our bar.
Equifax (EFX)
Market Cap: $25.38 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 Are We Wary of EFX?
- Day-to-day expenses have swelled relative to revenue over the last five years as its adjusted operating margin fell by 5.3 percentage points
- Annual earnings per share growth of 3.7% underperformed its revenue over the last five years, showing its incremental sales were less profitable
- Underwhelming 11.3% return on capital reflects management’s difficulties in finding profitable growth opportunities, and its falling returns suggest its earlier profit pools are drying up
Equifax’s stock price of $207.50 implies a valuation ratio of 24.5x forward P/E. Dive into our free research report to see why there are better opportunities than EFX.
ManpowerGroup (MAN)
Market Cap: $1.38 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 Do We Think MAN Will Underperform?
- Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
- Performance over the past five years shows each sale was less profitable, as its earnings per share fell by 18.4% annually
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
At $29.78 per share, ManpowerGroup trades at 8.6x forward P/E. Read our free research report to see why you should think twice about including MAN in your portfolio.
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