Business services providers play a critical role for enterprises, assisting them with everything from new hardware integrations to consulting and marketing. Furthermore, the demand for their offerings is rising as more clients outsource non-core functions, a trend that has enabled the industry to return 17.1% over the past six months. At the same time, the S&P 500 was up 8%.
Nevertheless, investors should tread carefully as many companies in this space are cyclical due to their reliance on corporate spending budgets. Keeping that in mind, here are two services stocks boasting durable advantages and one that may face trouble.
One Business Services Stock to Sell:
Benchmark (BHE)
Market Cap: $3.19 billion
Operating as a critical behind-the-scenes partner for complex technology products since 1979, Benchmark Electronics (NYSE: BHE) provides advanced manufacturing, engineering, and technology solutions for original equipment manufacturers across aerospace, medical, industrial, and technology sectors.
Why Are We Cautious About BHE?
- Annual sales declines of 2.1% for the past two years show its products and services struggled to connect with the market during this cycle
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
- Underwhelming 7.3% return on capital reflects management’s difficulties in finding profitable growth opportunities, and its shrinking returns suggest its past profit sources are losing steam
At $85.58 per share, Benchmark trades at 29.9x forward P/E. To fully understand why you should be careful with BHE, check out our full research report (it’s free).
Two Business Services Stocks to Watch:
Crane NXT (CXT)
Market Cap: $2.36 billion
Born from a corporate transformation completed in 2023, Crane NXT (NYSE: CXT) provides specialized technology solutions for payment processing, banknote security, and authentication systems for financial institutions and businesses.
Why Are We Fans of CXT?
- Backlog has averaged 15.3% growth over the past two years, showing it has a pipeline of unfulfilled orders that will support revenue in the future
- Revenue base of $1.71 billion gives it economies of scale and some distribution advantages
- Projected revenue growth of 16.3% for the next 12 months is above its two-year trend, pointing to accelerating demand
Crane NXT’s stock price of $51.96 implies a valuation ratio of 11.8x forward P/E. Is now a good time to buy? See for yourself in our full research report, it’s free.
Omnicom Group (OMC)
Market Cap: $21.54 billion
With a vast network of creative agencies that helped craft some of the most memorable ad campaigns in history, Omnicom Group (NYSE: OMC) is a strategic holding company that provides advertising, marketing, and communications services to many of the world's largest companies.
Why Will OMC Outperform?
- Market share has increased this cycle as its 15.4% annual revenue growth over the last two years was exceptional
- Massive revenue base of $19.82 billion makes it a well-known name that influences purchasing decisions
- Free cash flow margin expanded by 6.8 percentage points over the last five years, providing additional flexibility for investments and share buybacks/dividends
Omnicom Group is trading at $80.12 per share, or 7.5x forward P/E. Is now the right time to buy? Find out in our full research report, it’s free.
Stocks We Like Even More
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