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 19.8% over the past six months, almost identical to the S&P 500.
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 boasting a durable advantage and two that may face trouble.
Two Business Services Stocks to Sell:
Cognex (CGNX)
Market Cap: $7.69 billion
Founded in 1981 when computer vision was in its infancy, Cognex (NASDAQ: CGNX) develops machine vision systems and software that help manufacturers and logistics companies automate quality inspection and tracking of products.
Why Are We Wary of CGNX?
- Sales trends were unexciting over the last two years as its 2% annual growth was below the typical business services company
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 15.8 percentage points
- Eroding returns on capital suggest its historical profit centers are aging
Cognex’s stock price of $45.79 implies a valuation ratio of 46.8x forward P/E. Dive into our free research report to see why there are better opportunities than CGNX.
Interpublic Group (IPG)
Market Cap: $9.65 billion
With a history dating back to 1902 and roots in the McCann-Erickson agency, Interpublic Group (NYSE: IPG) is a marketing and communications holding company that owns agencies specializing in advertising, media buying, public relations, and digital marketing services.
Why Do We Steer Clear of IPG?
- Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
- Demand will likely be weak over the next 12 months as Wall Street expects flat revenue
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 17.1 percentage points
At $26.35 per share, Interpublic Group trades at 9.6x forward P/E. To fully understand why you should be careful with IPG, check out our full research report (it’s free).
One Business Services Stock to Watch:
Concentrix (CNXC)
Market Cap: $2.96 billion
With a team of approximately 450,000 employees across 75 countries, Concentrix (NASDAQ: CNXC) designs and delivers customer experience solutions that help global brands manage their customer interactions across digital channels and contact centers.
Why Does CNXC Stand Out?
- Market share has increased this cycle as its 22.1% annual revenue growth over the last two years was exceptional
- Revenue base of $9.72 billion gives it economies of scale and some distribution advantages
- Able to self-fund growth initiatives without relying on external capital thanks to its 5.6% free cash flow margin
Concentrix is trading at $47.68 per share, or 3.9x forward P/E. Is now the time to initiate a position? See for yourself in our full research report, it’s free.
Stocks We Like Even More
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