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 3.4% 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. Keeping that in mind, here are three services stocks that may face trouble.
Kyndryl (KD)
Market Cap: $3.25 billion
Born from IBM's managed infrastructure services business in a 2021 spinoff, Kyndryl (NYSE:KD) is the world's largest IT infrastructure services provider that designs, builds, and manages technology environments for enterprise customers.
Why Does KD Give Us Pause?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 4.8% annually over the last five years
- Poor free cash flow margin of -0.2% for the last five years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
- Push for growth has led to negative returns on capital, signaling value destruction
At $14.40 per share, Kyndryl trades at 6.9x forward P/E. Dive into our free research report to see why there are better opportunities than KD.
CDW (CDW)
Market Cap: $17.14 billion
Serving as a crucial bridge between technology manufacturers and end users since 1984, CDW (NASDAQ:CDW) is a multi-brand provider of information technology solutions that helps businesses and public sector organizations select, implement, and manage hardware, software, and IT services.
Why Is CDW Not Exciting?
- Large revenue base makes it harder to increase sales quickly, and its annual revenue growth of 2.4% over the last two years was below our standards for the business services sector
- Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 2.8%
- Flat earnings per share over the last two years lagged its peers
CDW is trading at $134.08 per share, or 12.7x forward P/E. To fully understand why you should be careful with CDW, check out our full research report (it’s free).
SS&C (SSNC)
Market Cap: $17.36 billion
Founded in 1986 as a bridge between technology and financial services, SS&C Technologies (NASDAQ:SSNC) provides software and software-enabled services that help financial firms and healthcare organizations automate complex business processes.
Why Are We Cautious About SSNC?
- Day-to-day expenses have swelled relative to revenue over the last five years as its adjusted operating margin fell by 1.4 percentage points
- Free cash flow margin dropped by 2.6 percentage points over the last five years, implying the company became more capital intensive as competition picked up
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
SS&C’s stock price of $72.11 implies a valuation ratio of 10.5x forward P/E. If you’re considering SSNC for your portfolio, see our FREE research report to learn more.
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