Business services providers play a critical role for enterprises, assisting them with everything from new hardware integrations to consulting and marketing. Still, investors are uneasy as firms face challenges from AI-driven disruptors and tightening corporate budgets. These doubts have caused the industry to lag recently as services stocks have collectively shed 12% over the past six months. This drop was worse than the S&P 500’s 5.8% loss.
A cautious approach is imperative when dabbling in these companies as many are also sensitive to the ebbs and flows of the broader economy. Taking that into account, here are three services stocks we’re steering clear of.
Getty Images (GETY)
Market Cap: $792.1 million
With a vast library of over 562 million visual assets documenting everything from breaking news to iconic historical moments, Getty Images (NYSE: GETY) is a global visual content marketplace that licenses photos, videos, illustrations, and music to businesses, media outlets, and creative professionals.
Why Does GETY Fall Short?
- Flat sales over the last two years suggest it must find different ways to grow during this cycle
- Free cash flow margin dropped by 6.2 percentage points over the last five years, implying the company became more capital intensive as competition picked up
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
Getty Images is trading at $1.91 per share, or 8x forward P/E. Check out our free in-depth research report to learn more about why GETY doesn’t pass our bar.
Benchmark (BHE)
Market Cap: $1.26 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 Is BHE Not Exciting?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 5.8% annually over the last two years
- Poor free cash flow margin of 1% for the last five years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
- Underwhelming 7.3% return on capital reflects management’s difficulties in finding profitable growth opportunities
Benchmark’s stock price of $34.81 implies a valuation ratio of 13.5x forward P/E. Dive into our free research report to see why there are better opportunities than BHE.
Lumen (LUMN)
Market Cap: $4.27 billion
With approximately 350,000 route miles of fiber optic cable spanning North America and the Asia Pacific, Lumen Technologies (NYSE: LUMN) operates a vast fiber optic network that provides communications, cloud connectivity, security, and IT solutions to businesses and consumers.
Why Are We Out on LUMN?
- Annual sales declines of 9.4% for the past five years show its products and services struggled to connect with the market during this cycle
- 7.4 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
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
At $4.17 per share, Lumen trades at 1.2x forward EV-to-EBITDA. If you’re considering LUMN for your portfolio, see our FREE research report to learn more.
Stocks We Like More
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