Business services providers play a critical role for enterprises, assisting them with everything from new hardware integrations to consulting and marketing. But increasing competition from AI-driven upstarts has tempered enthusiasm, limiting the industry’s gains to 18% over the past six months. This return lagged the S&P 500’s 20% 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. On that note, here are three services stocks we’re passing on.
Steelcase (SCS)
Market Cap: $1.82 billion
Founded in 1912 when metal office furniture was replacing wooden alternatives, Steelcase (NYSE: SCS) is a global office furniture manufacturer that designs and produces workplace solutions including desks, chairs, architectural products, and services.
Why Do We Pass on SCS?
- Products and services are facing end-market challenges during this cycle, as seen in its flat sales over the last five years
- Flat earnings per share over the last five years lagged its peers
- Poor free cash flow margin of 0.7% for the last five years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
At $15.84 per share, Steelcase trades at 13.2x forward P/E. Dive into our free research report to see why there are better opportunities than SCS.
ASGN (ASGN)
Market Cap: $1.90 billion
Evolving from its roots in IT staffing to become a high-end technology consulting powerhouse, ASGN (NYSE: ASGN) provides specialized IT consulting services and staffing solutions to Fortune 1000 companies and U.S. federal government agencies.
Why Is ASGN Risky?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 6.2% annually over the last two years
- Estimated sales for the next 12 months are flat and imply a softer demand environment
- Performance over the past five years shows its incremental sales were less profitable as its earnings per share were flat
ASGN is trading at $44.45 per share, or 9.3x forward P/E. Read our free research report to see why you should think twice about including ASGN in your portfolio.
CRA (CRAI)
Market Cap: $1.26 billion
Often retained for high-stakes matters with multibillion-dollar implications, CRA International (NASDAQ: CRAI) provides economic, financial, and management consulting services to corporations, law firms, and government agencies for litigation, regulatory proceedings, and business strategy.
Why Are We Cautious About CRAI?
- Revenue base of $731.1 million puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- Sales are projected to remain flat over the next 12 months as demand decelerates from its two-year trend
- Free cash flow margin shrank by 9.5 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
CRA’s stock price of $193.20 implies a valuation ratio of 18.5x forward EV-to-EBITDA. If you’re considering CRAI for your portfolio, see our FREE research report to learn more.
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