Business services providers play a critical role for enterprises, assisting them with everything from new hardware integrations to consulting and marketing. Still, investors are uneasy as firms face challenges from AI-driven disruptors and tightening corporate budgets. These doubts have caused the industry to lag recently as services stocks have collectively shed 5.7% over the past six months. This drawdown was disappointing since the S&P 500 held its ground.
A cautious approach is imperative when dabbling in these companies as many are also sensitive to the ebbs and flows of the broader economy. With that said, here are three services stocks we’re swiping left on.
Jabil (JBL)
Market Cap: $23.04 billion
With manufacturing facilities spanning the globe from China to Mexico to the United States, Jabil (NYSE: JBL) provides electronics design, manufacturing, and supply chain solutions to companies across various industries, from healthcare to automotive to cloud computing.
Why Does JBL Fall Short?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 10.1% annually over the last two years
- Earnings per share lagged its peers over the last two years as they only grew by 1.6% annually
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
Jabil’s stock price of $214.16 implies a valuation ratio of 21.3x forward P/E. Dive into our free research report to see why there are better opportunities than JBL.
PAR Technology (PAR)
Market Cap: $2.70 billion
Originally founded in 1968 as a defense contractor for the U.S. government, PAR Technology (NYSE: PAR) provides cloud-based software, payment processing, and hardware solutions that help restaurants manage everything from point-of-sale to customer loyalty programs.
Why Does PAR Give Us Pause?
- Costs have risen faster than its revenue over the last five years, causing its adjusted operating margin to decline by 6.3 percentage points
- Cash-burning history makes us doubt the long-term viability of its business model
- Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders
At $67.12 per share, PAR Technology trades at 252.4x forward P/E. Read our free research report to see why you should think twice about including PAR in your portfolio.
CoStar (CSGP)
Market Cap: $34.28 billion
With a research department that makes over 10,000 property updates daily to its 35-year-old database, CoStar Group (NASDAQ: CSGP) provides comprehensive real estate data, analytics, and online marketplaces for commercial and residential properties in the U.S. and U.K.
Why Is CSGP Not Exciting?
- Expenses have increased as a percentage of revenue over the last five years as its adjusted operating margin fell by 23.7 percentage points
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 4% annually while its revenue grew
- Free cash flow margin shrank by 16.6 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
CoStar is trading at $80.76 per share, or 76.5x forward P/E. To fully understand why you should be careful with CSGP, check out our full research report (it’s free).
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