Business services providers thrive by solving complex operational challenges for their clients, allowing them to focus on their secret sauce. But increasing competition from AI-driven upstarts has tempered enthusiasm, and over the past six months, the industry has pulled back by 4.6%. This drawdown was discouraging since the S&P 500 returned 4.1%.
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 that may face trouble.
Korn Ferry (KFY)
Market Cap: $3.87 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 Do We Think KFY Will Underperform?
- Sales tumbled by 1.8% annually over the last two years, showing market trends are working against its favor during this cycle
- Flat earnings per share over the last two years lagged its peers
- Diminishing returns on capital suggest its earlier profit pools are drying up
Korn Ferry’s stock price of $74.50 implies a valuation ratio of 14.9x forward P/E. Read our free research report to see why you should think twice about including KFY in your portfolio.
Verisk (VRSK)
Market Cap: $42.33 billion
Processing over 2.8 billion insurance transaction records annually through one of the world's largest private databases, Verisk Analytics (NASDAQ: VRSK) provides data, analytics, and technology solutions that help insurance companies assess risk, detect fraud, and make better business decisions.
Why Does VRSK Worry Us?
- 1.9% annual revenue growth over the last five years was slower than its business services peers
- Earnings growth over the last two years fell short of the peer group average as its EPS only increased by 8.7% annually
At $302.60 per share, Verisk trades at 41.9x forward P/E. Check out our free in-depth research report to learn more about why VRSK doesn’t pass our bar.
Accenture (ACN)
Market Cap: $177 billion
With a workforce of approximately 774,000 people serving clients in more than 120 countries, Accenture (NYSE: ACN) is a professional services firm that helps organizations transform their businesses through consulting, technology, operations, and digital services.
Why Are We Wary of ACN?
- Large revenue base makes it harder to increase sales quickly, and its annual revenue growth of 3.8% over the last two years was below our standards for the business services sector
- Free cash flow margin shrank by 4.1 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
- Diminishing returns on capital suggest its earlier profit pools are drying up
Accenture is trading at $283.01 per share, or 21.3x forward P/E. Read our free research report to see why you should think twice about including ACN in your portfolio.
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