Business services providers play a critical role for enterprises, assisting them with everything from new hardware integrations to consulting and marketing. These firms have helped their customers unlock huge efficiencies, so it’s no surprise the industry has posted a 24.6% gain over the past six months, nearly mirrorring the S&P 500.
Regardless of these results, investors must exercise caution as many companies in this space are sensitive to the ebbs and flows of the broader economy. On that note, here are three services stocks we’re steering clear of.
Driven Brands (DRVN)
Market Cap: $2.44 billion
With approximately 5,000 locations across 49 U.S. states and 13 other countries, Driven Brands (NASDAQ: DRVN) operates a network of automotive service centers offering maintenance, car washes, paint, collision repair, and glass services across North America.
Why Do We Think DRVN Will Underperform?
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
- 5× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
At $14.88 per share, Driven Brands trades at 11.5x forward P/E. Read our free research report to see why you should think twice about including DRVN in your portfolio.
OPENLANE (KAR)
Market Cap: $2.79 billion
Facilitating the sale of approximately 1.3 million used vehicles in 2023, OPENLANE (NYSE: KAR) operates digital marketplaces that connect sellers and buyers of used vehicles across North America and Europe, facilitating wholesale transactions.
Why Should You Sell KAR?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 5.3% annually over the last five years
- Underwhelming 2.6% return on capital reflects management’s difficulties in finding profitable growth opportunities
- High net-debt-to-EBITDA ratio of 5× increases the risk of forced asset sales or dilutive financing if operational performance weakens
OPENLANE is trading at $26.28 per share, or 22.4x forward P/E. Check out our free in-depth research report to learn more about why KAR doesn’t pass our bar.
Robert Half (RHI)
Market Cap: $2.74 billion
With roots dating back to 1948 as the first specialized recruiting firm for accounting and finance professionals, Robert Half (NYSE: RHI) provides specialized talent solutions and business consulting services, connecting skilled professionals with companies across various fields.
Why Is RHI Risky?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 9.4% annually over the last two years
- Earnings per share fell by 11.6% annually over the last five years while its revenue was flat, showing each sale was less profitable
- Diminishing returns on capital suggest its earlier profit pools are drying up
Robert Half’s stock price of $27.69 implies a valuation ratio of 18.1x forward P/E. To fully understand why you should be careful with RHI, check out our full research report (it’s free for active Edge members).
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