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 14.6% gain has fallen behind the S&P 500’s 17.4% rise.
Only some companies are subject to these dynamics, however, and a handful of high-quality businesses can deliver earnings growth in any environment. With that said, here is one services stock poised to generate sustainable market-beating returns and two best left ignored.
Two Business Services Stocks to Sell:
Interface (TILE)
Market Cap: $1.60 billion
Pioneering carbon-neutral flooring since its founding in 1973, Interface (NASDAQ: TILE) is a global manufacturer of modular carpet tiles, luxury vinyl tile (LVT), and rubber flooring that specializes in carbon-neutral and sustainable flooring solutions.
Why Is TILE Not Exciting?
- Muted 1.8% annual revenue growth over the last five years shows its demand lagged behind its business services peers
- Earnings growth underperformed the sector average over the last five years as its EPS grew by just 1.9% annually
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
At $27.39 per share, Interface trades at 15x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why TILE doesn’t pass our bar.
Connection (CNXN)
Market Cap: $1.60 billion
Starting as a small computer products seller in 1982 and evolving into a Fortune 1000 company, Connection (NASDAQ: CNXN) is a technology solutions provider that helps businesses and government agencies design, purchase, implement, and manage their IT infrastructure and systems.
Why Is CNXN Risky?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 1.3% annually over the last two years
- Earnings per share lagged its peers over the last two years as they only grew by 6.1% annually
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 2.3% for the last five years
Connection is trading at $63.19 per share, or 17.4x forward P/E. Dive into our free research report to see why there are better opportunities than CNXN.
One Business Services Stock to Watch:
Iridium (IRDM)
Market Cap: $1.91 billion
With a constellation of 66 low-earth orbit satellites providing coverage to every inch of the planet, Iridium Communications (NASDAQ: IRDM) operates a global satellite network that provides voice and data services to customers in remote areas where traditional telecommunications are unavailable.
Why Are We Positive On IRDM?
- Number of subscribers has surged, pointing to elevated demand
- Performance over the past two years was turbocharged by share buybacks, which enabled its earnings per share to grow faster than its revenue
- IRDM is a free cash flow machine with the flexibility to invest in growth initiatives or return capital to shareholders
Iridium’s stock price of $18.08 implies a valuation ratio of 13.8x forward P/E. Is now a good time to buy? Find out in our full research report, it’s free.
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