Business services providers thrive by solving complex operational challenges for their clients, allowing them to focus on their secret sauce. But increasing competition from AI-driven upstarts has tempered enthusiasm, and over the past six months, the industry has pulled back by 2.6%. This drop was discouraging since the S&P 500 returned 4.7%.
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 best left ignored.
Equifax (EFX)
Market Cap: $30.94 billion
Holding detailed financial records on over 800 million consumers worldwide and dating back to 1899, Equifax (NYSE: EFX) is a global data analytics company that collects, analyzes, and sells consumer and business credit information to lenders, employers, and other businesses.
Why Are We Cautious About EFX?
- Efficiency has decreased over the last five years as its adjusted operating margin fell by 6.3 percentage points
- Incremental sales over the last five years were less profitable as its 4.5% annual earnings per share growth lagged its revenue gains
- Below-average returns on capital indicate management struggled to find compelling investment opportunities, and its decreasing returns suggest its historical profit centers are aging
Equifax is trading at $250.66 per share, or 29.9x forward P/E. If you’re considering EFX for your portfolio, see our FREE research report to learn more.
FTI Consulting (FCN)
Market Cap: $5.37 billion
With a team of experts deployed across 30+ countries to tackle complex business challenges, FTI Consulting (NYSE: FCN) is a global business advisory firm that helps organizations manage change, mitigate risk, and resolve disputes across financial, legal, operational, and regulatory matters.
Why Is FCN Not Exciting?
- Day-to-day expenses have swelled relative to revenue over the last five years as its adjusted operating margin fell by 3.1 percentage points
- Earnings per share lagged its peers over the last two years as they only grew by 7.6% annually
- Free cash flow margin dropped by 6 percentage points over the last five years, implying the company became more capital intensive as competition picked up
At $169.10 per share, FTI Consulting trades at 20.7x forward P/E. To fully understand why you should be careful with FCN, check out our full research report (it’s free).
ManpowerGroup (MAN)
Market Cap: $1.95 billion
Founded during the post-World War II economic boom when businesses needed temporary workers, ManpowerGroup (NYSE: MAN) connects millions of people to employment opportunities through its global network of staffing, recruitment, and workforce management services.
Why Do We Avoid MAN?
- Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
- Performance over the past five years shows each sale was less profitable as its earnings per share dropped by 16% annually, worse than its revenue
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
ManpowerGroup’s stock price of $42.21 implies a valuation ratio of 12.2x forward P/E. Read our free research report to see why you should think twice about including MAN in your portfolio.
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