Business services providers use their specialized expertise to help enterprises streamline operations and cut costs. Still, investors are uneasy as firms face challenges from AI-driven disruptors and tightening corporate budgets. These doubts have certainly contributed to services stocks’ recent underperformance - over the past six months, the industry’s 6.1% gain has fallen behind the S&P 500’s 16.3% rise.
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 passing on.
UniFirst (UNF)
Market Cap: $2.88 billion
With a fleet of trucks making weekly deliveries to over 300,000 customer locations, UniFirst (NYSE: UNF) provides, rents, cleans, and maintains workplace uniforms and protective clothing for businesses across various industries.
Why Is UNF Not Exciting?
- Annual revenue growth of 4.4% over the last two years was below our standards for the business services sector
- Earnings per share lagged its peers over the last five years as they only grew by 2.3% annually
- Underwhelming 7.5% return on capital reflects management’s difficulties in finding profitable growth opportunities, and its falling returns suggest its earlier profit pools are drying up
At $159.39 per share, UniFirst trades at 22.1x forward P/E. To fully understand why you should be careful with UNF, check out our full research report (it’s free for active Edge members).
CSG (CSGS)
Market Cap: $2.13 billion
Powering billions of critical customer interactions annually, CSG Systems (NASDAQ: CSGS) provides cloud-based software platforms that help companies manage customer interactions, process payments, and monetize their services.
Why Do We Think CSGS Will Underperform?
- Annual revenue growth of 2.3% over the last two years was below our standards for the business services sector
- Subscale operations are evident in its revenue base of $1.22 billion, meaning it has fewer distribution channels than its larger rivals
- Estimated sales growth of 1.7% for the next 12 months is soft and implies weaker demand
CSG is trading at $78.47 per share, or 15.7x forward P/E. If you’re considering CSGS for your portfolio, see our FREE research report to learn more.
FTI Consulting (FCN)
Market Cap: $4.99 billion
With a team of experts deployed across 30+ countries to tackle complex business challenges, FTI Consulting (NYSE: FCN) is a global business advisory firm that helps organizations manage change, mitigate risk, and resolve disputes across financial, legal, operational, and regulatory matters.
Why Does FCN Give Us Pause?
- Efficiency has decreased over the last five years as its adjusted operating margin fell by 2.7 percentage points
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 9.1 percentage points
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
FTI Consulting’s stock price of $164.94 implies a valuation ratio of 19.2x forward P/E. Read our free research report to see why you should think twice about including FCN in your portfolio.
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