Business services providers use their specialized expertise to help enterprises streamline operations and cut costs. These firms have helped their customers unlock huge efficiencies, so it’s no surprise the industry has posted a 11.8% gain over the past six months, nearly mirrorring the S&P 500.
Although these companies have produced results, only a handful will thrive over the long term as AI-driven upstarts are rapidly taking share from the incumbents. With that said, here is one services stock poised to generate sustainable market-beating returns and two we’re steering clear of.
Two Business Services Stocks to Sell:
Kyndryl (KD)
Market Cap: $6.18 billion
Born from IBM's managed infrastructure services business in a 2021 spinoff, Kyndryl (NYSE: KD) is the world's largest IT infrastructure services provider that designs, builds, and manages technology environments for enterprise customers.
Why Are We Cautious About KD?
- Sales tumbled by 4.8% annually over the last five years, showing market trends are working against its favor during this cycle
- Low free cash flow margin of -0.4% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
- Negative returns on capital show that some of its growth strategies have backfired
At $27.18 per share, Kyndryl trades at 8.3x forward P/E. Dive into our free research report to see why there are better opportunities than KD.
ManpowerGroup (MAN)
Market Cap: $1.43 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 Is MAN Risky?
- Organic revenue growth fell short of our benchmarks over the past two years and implies it may need to improve its products, pricing, or go-to-market strategy
- Sales over the last five years were less profitable as its earnings per share fell by 18.4% annually while its revenue was flat
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
ManpowerGroup’s stock price of $30.98 implies a valuation ratio of 8.9x forward P/E. Read our free research report to see why you should think twice about including MAN in your portfolio.
One Business Services Stock to Buy:
Motorola Solutions (MSI)
Market Cap: $65.7 billion
Born from the company that invented the first portable handheld police radio in 1940, Motorola Solutions (NYSE: MSI) provides mission-critical communications, video security, and command center software solutions for public safety agencies and enterprise customers.
Why Are We Backing MSI?
- 8.5% annual revenue growth over the last five years surpassed the sector average as its services resonated with customers
- Sizeable revenue base of $11.31 billion gives it economies of scale and distribution advantages
- Strong free cash flow margin of 18.8% enables it to reinvest or return capital consistently, and its growing cash flow gives it even more resources to deploy
Motorola Solutions is trading at $394.93 per share, or 24.8x forward P/E. Is now the right time to buy? See for yourself in our in-depth research report, it’s free.
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