Business services providers thrive by solving complex operational challenges for their clients, allowing them to focus on their secret sauce. 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’s 8.6% return has trailed the S&P 500 by 1.8 percentage points.
A cautious approach is imperative when dabbling in these companies as many are also sensitive to the ebbs and flows of the broader economy. Keeping that in mind, here are three services stocks we’re swiping left on.
Benchmark (BHE)
Market Cap: $1.61 billion
Operating as a critical behind-the-scenes partner for complex technology products since 1979, Benchmark Electronics (NYSE: BHE) provides advanced manufacturing, engineering, and technology solutions for original equipment manufacturers across aerospace, medical, industrial, and technology sectors.
Why Is BHE Not Exciting?
- Annual sales declines of 5.1% for the past two years show its products and services struggled to connect with the market during this cycle
- Earnings growth over the last two years fell short of the peer group average as its EPS only increased by 5.4% annually
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 0.9% for the last five years
Benchmark’s stock price of $45.05 implies a valuation ratio of 18.4x forward P/E. Read our free research report to see why you should think twice about including BHE in your portfolio.
Cisco (CSCO)
Market Cap: $291.9 billion
Founded in 1984 by a husband and wife team who wanted computers at Stanford to talk to computers at UC Berkeley, Cisco (NASDAQ: CSCO) designs and sells networking equipment, security solutions, and collaboration tools that help businesses connect their systems and secure their digital operations.
Why Does CSCO Give Us Pause?
- Products and services are facing end-market challenges during this cycle, as seen in its flat sales over the last two years
- 5.8 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
- Eroding returns on capital suggest its historical profit centers are aging
At $73.96 per share, Cisco trades at 17.6x forward P/E. If you’re considering CSCO for your portfolio, see our FREE research report to learn more.
Xerox (XRX)
Market Cap: $325.2 million
Pioneering the modern office copier and inventing technologies like Ethernet and the laser printer, Xerox (NASDAQ: XRX) provides document management systems, printing technology, and workplace solutions to businesses of all sizes across the globe.
Why Do We Pass on XRX?
- Sales tumbled by 2.6% annually over the last five years, showing market trends are working against its favor during this cycle
- Performance over the past five years shows each sale was less profitable as its earnings per share dropped by 15.6% annually, worse than its revenue
- High net-debt-to-EBITDA ratio of 8× increases the risk of forced asset sales or dilutive financing if operational performance weakens
Xerox is trading at $2.57 per share, or 3.1x forward P/E. Check out our free in-depth research report to learn more about why XRX doesn’t pass our bar.
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