Business services providers use their specialized expertise to help enterprises streamline operations and cut costs. Furthermore, the demand for their offerings is rising as more clients outsource non-core functions, a trend that has enabled the industry to return 24.9% over the past six months. At the same time, the S&P 500 was up 13.1%.
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. Taking that into account, here are three services stocks we’re steering clear of.
Cognex (CGNX)
Market Cap: $10.36 billion
Founded in 1981 when computer vision was in its infancy, Cognex (NASDAQ:CGNX) develops machine vision systems and software that help manufacturers and logistics companies automate quality inspection and tracking of products.
Why Is CGNX Not Exciting?
- Annual revenue growth of 2.1% over the last five years was below our standards for the business services sector
- Falling earnings per share over the last five years has some investors worried as stock prices ultimately follow EPS over the long term
- Waning returns on capital imply its previous profit engines are losing steam
Cognex is trading at $62.97 per share, or 32.8x forward P/E. To fully understand why you should be careful with CGNX, check out our full research report (it’s free).
Xerox (XRX)
Market Cap: $412.3 million
Pioneering the modern office copier and inventing technologies like Ethernet and the laser printer, Xerox (NASDAQ:XRX) provides document management systems, printing technology, and workplace solutions to businesses of all sizes across the globe.
Why Are We Out on XRX?
- Muted 1.5% annual revenue growth over the last five years shows its demand lagged behind its business services peers
- Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 50.9% annually
- 5× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
Xerox’s stock price of $3.19 implies a valuation ratio of 10.1x forward P/E. If you’re considering XRX for your portfolio, see our FREE research report to learn more.
Viasat (VSAT)
Market Cap: $11.42 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 Do We Pass on VSAT?
- Sales stagnated over the last two years and signal the need for new growth strategies
- Earnings per share fell by 8.4% annually over the last five years while its revenue grew, partly because it diluted shareholders
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
At $83.25 per share, Viasat trades at 10.9x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why VSAT doesn’t pass our bar.
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