3 Services Stocks We Approach with Caution
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 21.8% gain for the industry over the past six months - 8.6 percentage points higher than 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. On that note, here are three services stocks best left ignored.
Array (AD)
Market Cap: $3.06 billion
Operating as a majority-owned subsidiary of Telephone and Data Systems since its founding in 1983, Array (NYSE:AD) is a regional wireless telecommunications provider.
Why Are We Out on AD?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 44.7% annually over the last five years
- 162.1 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
- Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution
Array is trading at $35.38 per share, or 32.4x forward P/E. To fully understand why you should be careful with AD, check out our full research report (it’s free).
Ingram Micro (INGM)
Market Cap: $6.46 billion
Operating as the crucial link in the global technology supply chain with a presence in 57 countries, Ingram Micro (NYSE:INGM) is a global technology distributor that connects manufacturers with resellers, providing hardware, software, cloud services, and logistics expertise.
Why Are We Wary of INGM?
- Sales were flat over the last five years, indicating it’s failed to expand this cycle
- Earnings growth underperformed the sector average over the last four years as its EPS grew by just 3.4% annually
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 0% for the last five years
Ingram Micro’s stock price of $27.99 implies a valuation ratio of 8.1x forward P/E. Check out our free in-depth research report to learn more about why INGM doesn’t pass our bar.
Insight Enterprises (NSIT)
Market Cap: $4.38 billion
With over 35 years of IT expertise and partnerships with more than 8,000 technology providers, Insight Enterprises (NASDAQ:NSIT) provides end-to-end digital transformation solutions that help businesses modernize their IT infrastructure and maximize the value of technology.
Why Is NSIT Not Exciting?
- Sales stagnated over the last five years and signal the need for new growth strategies
- Poor free cash flow margin of 3.5% for the last five years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
- Eroding returns on capital suggest its historical profit centers are aging
At $149.38 per share, Insight Enterprises trades at 12.2x forward P/E. To fully understand why you should be careful with NSIT, check out our full research report (it’s free).
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