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 14.2% gain over the past six months, nearly mirrorring 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. Taking that into account, here is one services stock poised to generate sustainable market-beating returns and two that may face trouble.
Two Business Services Stocks to Sell:
Equifax (EFX)
Market Cap: $19.15 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 Does EFX Fall Short?
- Expenses have increased as a percentage of revenue over the last five years as its adjusted operating margin fell by 3.9 percentage points
- Earnings growth underperformed the sector average over the last five years as its EPS grew by just 1.4% annually
Equifax is trading at $161.20 per share, or 18.4x forward P/E. Check out our free in-depth research report to learn more about why EFX doesn’t pass our bar.
IAC (IAC)
Market Cap: $3.00 billion
Originally known as InterActiveCorp and built through Barry Diller's strategic acquisitions since the 1990s, IAC (NASDAQ: IAC) operates a portfolio of category-leading digital businesses including Dotdash Meredith, Angi, and Care.com, focusing on digital publishing, home services, and caregiving platforms.
Why Do We Avoid IAC?
- Sales tumbled by 5.5% annually over the last five years, showing market trends are working against its favor during this cycle
- Earnings per share have dipped by 21% annually over the past five years, which is concerning because stock prices follow EPS over the long term
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
At $40.24 per share, IAC trades at 21.7x forward P/E. To fully understand why you should be careful with IAC, check out our full research report (it’s free).
One Business Services Stock to Watch:
Tetra Tech (TTEK)
Market Cap: $7.07 billion
With a 50-year legacy of "Leading with Science" and operations on all seven continents, Tetra Tech (NASDAQ: TTEK) provides high-end consulting and engineering services focused on water management, environmental solutions, and sustainable infrastructure for government and commercial clients worldwide.
Why Could TTEK Be a Winner?
- Impressive 13.3% annual revenue growth over the last five years indicates it’s winning market share this cycle
- Share buybacks catapulted its annual earnings per share growth to 30.1%, which outperformed its revenue gains over the last two years
- Free cash flow margin expanded by 3.6 percentage points over the last five years, providing additional flexibility for investments and share buybacks/dividends
Tetra Tech’s stock price of $27.24 implies a valuation ratio of 16.9x forward P/E. Is now the right time to buy? Find out in our full research report, it’s free.
Stocks We Like Even More
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