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 certainly contributed to the industry’s recent underperformance - over the past six months, services stocks were flat while the S&P 500 was up 3.4%.
A cautious approach is imperative when dabbling in these companies as many are also sensitive to the ebbs and flows of the broader economy. On that note, here are three services stocks we’re swiping left on.
Pitney Bowes (PBI)
Market Cap: $2.24 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 Do We Think Twice About PBI?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 11.8% annually over the last five years
- Forecasted revenue decline of 3.1% for the upcoming 12 months implies demand will fall even further
Pitney Bowes is trading at $15.68 per share, or 9.8x forward P/E. Dive into our free research report to see why there are better opportunities than PBI.
Cognex (CGNX)
Market Cap: $9.06 billion
Founded in 1981 when computer vision was in its infancy, Cognex (NASDAQ:CGNX) develops machine vision systems and software that help manufacturers and logistics companies automate quality inspection and tracking of products.
Why Are We Hesitant About CGNX?
- Annual revenue growth of 4.2% over the last five years was below our standards for the business services sector
- Earnings per share fell by 1.3% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
- Diminishing returns on capital suggest its earlier profit pools are drying up
At $55.33 per share, Cognex trades at 43.3x forward P/E. If you’re considering CGNX for your portfolio, see our FREE research report to learn more.
First Advantage (FA)
Market Cap: $2.17 billion
Processing over 200 million screens annually across more than 200 countries and territories, First Advantage (NASDAQ:FA) provides employment background screening, identity verification, and compliance solutions to help companies manage hiring risks.
Why Is FA Not Exciting?
- Flat earnings per share over the last four years underperformed the sector average
- Free cash flow margin dropped by 8.6 percentage points over the last five years, implying the company became more capital intensive as competition picked up
- Low returns on capital reflect management’s struggle to allocate funds effectively, and its shrinking returns suggest its past profit sources are losing steam
First Advantage’s stock price of $12.47 implies a valuation ratio of 10.2x forward P/E. Read our free research report to see why you should think twice about including FA in your portfolio.
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