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 7.7% 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 is one services stock boasting a durable advantage and two we’re steering clear of.
Two Business Services Stocks to Sell:
Diebold Nixdorf (DBD)
Market Cap: $2.83 billion
With roots dating back to 1859 and a presence in over 100 countries, Diebold Nixdorf (NYSE: DBD) provides automated self-service technology, software, and services that help banks and retailers digitize their customer transactions.
Why Are We Out on DBD?
- Sales stagnated over the last five years and signal the need for new growth strategies
- Earnings per share have contracted by 10% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
Diebold Nixdorf is trading at $82.74 per share, or 13.9x forward P/E. Check out our free in-depth research report to learn more about why DBD doesn’t pass our bar.
Insperity (NSP)
Market Cap: $1.44 billion
Pioneering the professional employer organization (PEO) industry it helped establish, Insperity (NYSE: NSP) provides human resources outsourcing services to small and medium-sized businesses, handling payroll, benefits, compliance, and HR administration.
Why Should You Dump NSP?
- 2.5% annual revenue growth over the last two years was slower than its business services peers
- Earnings per share fell by 30.5% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 4.6 percentage points
Insperity’s stock price of $37 implies a valuation ratio of 15.6x forward P/E. To fully understand why you should be careful with NSP, check out our full research report (it’s free).
One Business Services Stock to Buy:
Amphenol (APH)
Market Cap: $187.6 billion
With over 90 years of connecting the world's technologies, Amphenol (NYSE: APH) designs and manufactures connectors, cables, sensors, and interconnect systems that enable electrical and electronic connections across virtually every industry.
Why Will APH Beat the Market?
- Annual revenue growth of 42.1% over the last two years was superb and indicates its market share increased during this cycle
- Incremental sales over the last two years have been highly profitable as its earnings per share increased by 55.5% annually, topping its revenue gains
- Robust free cash flow margin of 15.4% gives it many options for capital deployment, and its growing cash flow gives it even more resources to deploy
At $159.26 per share, Amphenol trades at 33.3x 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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