Business services providers thrive by solving complex operational challenges for their clients, allowing them to focus on their secret sauce. These firms have helped their customers unlock huge efficiencies, so it’s no surprise the industry has posted a 13.1% gain over the past six months, nearly mirrorring the S&P 500.
Nevertheless, investors should tread carefully as many companies in this space are cyclical due to their reliance on corporate spending budgets. With that said, here is one resilient services stock at the top of our wish list and two best left ignored.
Two Business Services Stocks to Sell:
Jabil (JBL)
Market Cap: $25.03 billion
With manufacturing facilities spanning the globe from China to Mexico to the United States, Jabil (NYSE: JBL) provides electronics design, manufacturing, and supply chain solutions to companies across various industries, from healthcare to automotive to cloud computing.
Why Does JBL Worry Us?
- Sales tumbled by 7.3% annually over the last two years, showing market trends are working against its favor during this cycle
- Earnings per share lagged its peers over the last two years as they only grew by 6.5% annually
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
At $234.10 per share, Jabil trades at 20.7x forward P/E. To fully understand why you should be careful with JBL, check out our full research report (it’s free for active Edge members).
SS&C (SSNC)
Market Cap: $21.25 billion
Founded in 1986 as a bridge between technology and financial services, SS&C Technologies (NASDAQ: SSNC) provides software and software-enabled services that help financial firms and healthcare organizations automate complex business processes.
Why Are We Hesitant About SSNC?
- Expenses have increased as a percentage of revenue over the last five years as its adjusted operating margin fell by 1.2 percentage points
- 4.1 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
SS&C is trading at $86.98 per share, or 13.2x forward P/E. Read our free research report to see why you should think twice about including SSNC in your portfolio.
One Business Services Stock to Buy:
Magnite (MGNI)
Market Cap: $2.3 billion
Born from the 2020 merger of Rubicon Project and Telaria, Magnite (NASDAQ: MGNI) operates the world's largest independent sell-side advertising platform that automates the buying and selling of digital advertising inventory across all channels and formats.
Why Will MGNI Outperform?
- Impressive 30.2% annual revenue growth over the last five years indicates it’s winning market share this cycle
- Robust free cash flow margin of 24.8% gives it many options for capital deployment, and its rising cash conversion increases its margin of safety
- Rising returns on capital show the company is starting to reap the benefits of its past investments
Magnite’s stock price of $16.04 implies a valuation ratio of 16.1x forward P/E. Is now the right time to buy? See for yourself in our comprehensive research report, it’s free for active Edge members .
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