Business services providers use their specialized expertise to help enterprises streamline operations and cut costs. Market leaders have certainly capitalized on outsourcing trends and digital transformation initiatives to boost sales, helping fuel a 9.2% gain for the industry over the past six months. This performance has closely followed the S&P 500.
Regardless of these results, investors must exercise caution as many companies in this space are sensitive to the ebbs and flows of the broader economy. With that said, here are two resilient services stocks at the top of our wish list and one best left ignored.
One Business Services Stock to Sell:
ScanSource (SCSC)
Market Cap: $943.3 million
Operating as a crucial link in the technology supply chain since 1992, ScanSource (NASDAQ: SCSC) is a hybrid distributor that connects hardware, software, and cloud services from technology suppliers to resellers and business customers.
Why Do We Steer Clear of SCSC?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 11.1% annually over the last two years
- Earnings growth over the last two years fell short of the peer group average as its EPS only increased by 3.8% annually
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 2.6% for the last five years
At $43.02 per share, ScanSource trades at 9.9x forward P/E. To fully understand why you should be careful with SCSC, check out our full research report (it’s free).
Two Business Services Stocks to Watch:
Globalstar (GSAT)
Market Cap: $7.82 billion
Known for powering the emergency SOS feature in newer Apple iPhones, Globalstar (NASDAQ: GSAT) operates a network of low-earth orbit satellites that provide voice and data communications services in remote areas where traditional cellular networks don't reach.
Why Will GSAT Beat the Market?
- Market share has increased this cycle as its 15.6% annual revenue growth over the last five years was exceptional
- 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
- Historical investments are beginning to pay off as its returns on capital are growing
Globalstar’s stock price of $61.91 implies a valuation ratio of 189.9x forward P/E. Is now the time to initiate a position? Find out in our full research report, it’s free.
Viasat (VSAT)
Market Cap: $6.11 billion
Operating a fleet of 23 satellites that orbit the Earth and beam connectivity from space, Viasat (NASDAQ: VSAT) provides satellite-based communications networks and services for airlines, maritime vessels, governments, businesses, and residential customers worldwide.
Why Is VSAT Interesting?
- Annual revenue growth of 17.4% over the last two years was superb and indicates its market share increased during this cycle
- $4.58 billion in revenue allows it to spread its fixed costs across a wider base
- Unchanged returns on capital make it difficult for the company’s valuation multiple to re-rate
Viasat is trading at $45.21 per share, or 58.7x forward P/E. Is now the right time to buy? See for yourself in our comprehensive research report, it’s free.
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