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 10.5% over the past six months. This return lagged the S&P 500’s 12.7% 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. With that said, here are three services stocks we’re swiping left on.
Pitney Bowes (PBI)
Market Cap: $1.71 billion
With a century-long history dating back to 1920 and processing over 15 billion pieces of mail annually, Pitney Bowes (NYSE: PBI) provides shipping, mailing technology, logistics, and financial services to businesses of all sizes.
Why Are We Cautious About PBI?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 10.5% annually over the last five years
- Projected sales decline of 3.5% over the next 12 months indicates demand will continue deteriorating
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
Pitney Bowes’s stock price of $10.75 implies a valuation ratio of 7.4x forward P/E. If you’re considering PBI for your portfolio, see our FREE research report to learn more.
Amdocs (DOX)
Market Cap: $8.69 billion
Powering the digital experiences of approximately 400 communications companies worldwide, Amdocs (NASDAQ: DOX) provides software and services that help telecommunications and media companies manage customer relationships, monetize services, and automate network operations.
Why Should You Dump DOX?
- Backlog failed to grow over the past two years, suggesting the company may need to tweak its product roadmap and go-to-market strategy
- Anticipated sales growth of 3.3% for the next year implies demand will be shaky
- Free cash flow margin dropped by 2.4 percentage points over the last five years, implying the company became more capital intensive as competition picked up
At $80.52 per share, Amdocs trades at 10.8x forward P/E. Read our free research report to see why you should think twice about including DOX in your portfolio.
Korn Ferry (KFY)
Market Cap: $3.56 billion
With clients including 97% of the S&P 100 and operations in 103 offices across 51 countries, Korn Ferry (NYSE: KFY) is a global consulting firm that helps organizations design optimal structures, recruit talent, develop leaders, and create effective compensation strategies.
Why Does KFY Fall Short?
- Flat sales over the last two years suggest it must find different ways to grow during this cycle
- Costs have risen faster than its revenue over the last five years, causing its adjusted operating margin to decline by 3.3 percentage points
- Diminishing returns on capital suggest its earlier profit pools are drying up
Korn Ferry is trading at $68.27 per share, or 12.8x forward P/E. To fully understand why you should be careful with KFY, check out our full research report (it’s free for active Edge members).
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