Business services providers play a critical role for enterprises, assisting them with everything from new hardware integrations to consulting and marketing. Furthermore, the demand for their offerings is rising as more clients outsource non-core functions, a trend that has enabled the industry to return 9% over the past six months, almost identical to 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 resilient services stock at the top of our wish list and two we’re swiping left on.
Two Business Services Stocks to Sell:
Wiley (WLY)
Market Cap: $1.67 billion
With roots dating back to 1807 when Charles Wiley opened a small printing shop in Manhattan, John Wiley & Sons (NYSE:WLY) is a global academic publisher that provides scientific journals, books, digital courseware, and knowledge solutions for researchers, students, and professionals.
Why Do We Pass on WLY?
- Sales tumbled by 2.2% annually over the last five years, showing market trends are working against its favor during this cycle
- Demand will likely be weak over the next 12 months as Wall Street expects flat revenue
- Free cash flow margin shrank by 4.3 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
At $31.62 per share, Wiley trades at 1x trailing 12-month price-to-sales. Dive into our free research report to see why there are better opportunities than WLY.
Plexus (PLXS)
Market Cap: $4.85 billion
With over 20,000 team members across 26 global facilities, Plexus (NASDAQ:PLXS) designs, manufactures, and services complex electronic products for companies in aerospace/defense, healthcare, and industrial sectors.
Why Are We Wary of PLXS?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 2.1% annually over the last two years
- Poor free cash flow margin of 2.7% for the last five years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
- Waning returns on capital imply its previous profit engines are losing steam
Plexus is trading at $181.38 per share, or 24.6x forward P/E. If you’re considering PLXS for your portfolio, see our FREE research report to learn more.
One Business Services Stock to Watch:
EPAM (EPAM)
Market Cap: $12.1 billion
Founded in 1993 during the early days of offshore software development, EPAM Systems (NYSE:EPAM) provides digital engineering, cloud, and AI transformation services to help global enterprises and startups modernize their technology systems and create digital products.
Why Does EPAM Stand Out?
- Economies of scale give it some operating leverage when demand rises
- Robust free cash flow margin of 10.5% gives it many options for capital deployment
- ROIC punches in at 25.5%, illustrating management’s expertise in identifying profitable investments
EPAM’s stock price of $218.76 implies a valuation ratio of 17.3x forward P/E. Is now the time to initiate a position? See for yourself in our in-depth research report, it’s free.
Stocks We Like Even More
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