Business services providers thrive by solving complex operational challenges for their clients, allowing them to focus on their secret sauce. Market leaders have certainly capitalized on outsourcing trends and digital transformation initiatives to boost sales, helping fuel a 13% gain for the industry over the past six months. This performance has closely followed the S&P 500.
Nevertheless, investors should tread carefully as many companies in this space are cyclical due to their reliance on corporate spending budgets. Keeping that in mind, here is one services stock boasting a durable advantage and two that may face trouble.
Two Business Services Stocks to Sell:
Rogers (ROG)
Market Cap: $2.39 billion
With roots dating back to 1832, making it one of America's oldest continuously operating companies, Rogers (NYSE: ROG) designs and manufactures specialized engineered materials and components used in electric vehicles, telecommunications, renewable energy, and other high-performance applications.
Why Do We Steer Clear of ROG?
- Products and services are facing end-market challenges during this cycle, as seen in its flat sales over the last five years
- Expenses have increased as a percentage of revenue over the last five years as its adjusted operating margin fell by 4.7 percentage points
- Falling earnings per share over the last five years has some investors worried as stock prices ultimately follow EPS over the long term
Rogers is trading at $133.80 per share, or 3x trailing 12-month price-to-sales. To fully understand why you should be careful with ROG, check out our full research report (it’s free).
ABM (ABM)
Market Cap: $2.35 billion
With roots dating back to 1909 as a window washing company, ABM Industries (NYSE: ABM) provides integrated facility management, infrastructure, and mobility solutions across various sectors including commercial, manufacturing, education, and aviation.
Why Is ABM Not Exciting?
- 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
- Earnings per share have contracted by 2.4% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance
- Poor free cash flow margin of 1.9% for the last five years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
At $40.18 per share, ABM trades at 9.7x forward P/E. Check out our free in-depth research report to learn more about why ABM doesn’t pass our bar.
One Business Services Stock to Watch:
TransUnion (TRU)
Market Cap: $13.23 billion
One of the three major credit bureaus in the United States alongside Equifax and Experian, TransUnion (NYSE: TRU) is a global information and insights company that provides credit reports, fraud prevention tools, and data analytics to help businesses make decisions and consumers manage their financial health.
Why Are We Fans of TRU?
- Market share has increased this cycle as its 11.6% annual revenue growth over the last five years was exceptional
- Sales outlook for the upcoming 12 months implies the business will stay on its desirable two-year growth trajectory
- Impressive free cash flow profitability enables the company to fund new investments or reward investors with share buybacks/dividends, and its growing cash flow gives it even more resources to deploy
TransUnion’s stock price of $68.61 implies a valuation ratio of 13.4x forward P/E. Is now the time to initiate a position? Find out in our full research report, it’s free.
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