Business services providers use their specialized expertise to help enterprises streamline operations and cut costs. But cutbacks in corporate spending and the threat of new AI products have kept sentiment in check, and over the past six months, the industry has tumbled by 10.9%. This drawdown was worse than the S&P 500’s 3.3% fall.
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 passing on.
ASGN (ASGN)
Market Cap: $2.35 billion
Evolving from its roots in IT staffing to become a high-end technology consulting powerhouse, ASGN (NYSE: ASGN) provides specialized IT consulting services and staffing solutions to Fortune 1000 companies and U.S. federal government agencies.
Why Is ASGN Risky?
- Annual sales declines of 6.7% for the past two years show its products and services struggled to connect with the market during this cycle
- Sales were less profitable over the last two years as its earnings per share fell by 11.6% annually, worse than its revenue declines
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 5.1 percentage points
ASGN’s stock price of $53.55 implies a valuation ratio of 10.6x forward P/E. Dive into our free research report to see why there are better opportunities than ASGN.
Amdocs (DOX)
Market Cap: $10.16 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 Do We Pass on DOX?
- New orders were hard to come by as its average backlog growth of 1.6% over the past two years underwhelmed
- Sales are projected to tank by 3.5% over the next 12 months as demand evaporates further
- 4.6 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
At $90.69 per share, Amdocs trades at 12.5x forward P/E. To fully understand why you should be careful with DOX, check out our full research report (it’s free).
Maximus (MMS)
Market Cap: $4.08 billion
With nearly 50 years of experience translating public policy into operational programs that serve millions of citizens, Maximus (NYSE: MMS) provides operational services, clinical assessments, and technology solutions to government agencies in the U.S. and internationally.
Why Does MMS Fall Short?
- Demand is forecasted to shrink as its estimated sales for the next 12 months are flat
- Free cash flow margin shrank by 5.9 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
Maximus is trading at $72.40 per share, or 11.3x forward P/E. If you’re considering MMS for your portfolio, see our FREE research report to learn more.
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