Business services providers play a critical role for enterprises, assisting them with everything from new hardware integrations to consulting and marketing. These firms have helped their customers unlock huge efficiencies, so it’s no surprise the industry has posted a 3.4% gain over the past six months, nearly mirrorring the S&P 500.
Although these companies have produced results, only a handful will thrive over the long term as AI-driven upstarts are rapidly taking share from the incumbents. With that said, here are three services stocks best left ignored.
Crane NXT (CXT)
Market Cap: $2.67 billion
Born from a corporate transformation completed in 2023, Crane NXT (NYSE:CXT) provides specialized technology solutions for payment processing, banknote security, and authentication systems for financial institutions and businesses.
Why Does CXT Worry Us?
- Muted 3.3% annual revenue growth over the last three years shows its demand lagged behind its business services peers
- Incremental sales over the last two years were much less profitable as its earnings per share fell by 1.3% annually while its revenue grew
- Capital intensity has ramped up over the last four years as its free cash flow margin decreased by 7.9 percentage points
At $46.40 per share, Crane NXT trades at 10.3x forward P/E. Check out our free in-depth research report to learn more about why CXT doesn’t pass our bar.
Kforce (KFRC)
Market Cap: $523.8 million
With nearly 60 years of matching skilled professionals with the right opportunities, Kforce (NYSE:KFRC) is a professional staffing company that specializes in placing technology and finance experts with businesses on both temporary and permanent bases.
Why Should You Sell KFRC?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 1% annually over the last five years
- Earnings per share decreased by more than its revenue over the last five years, showing each sale was less profitable
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
Kforce’s stock price of $30.56 implies a valuation ratio of 14.1x forward P/E. To fully understand why you should be careful with KFRC, check out our full research report (it’s free).
Ziff Davis (ZD)
Market Cap: $1.80 billion
Originally a pioneering technology publisher founded in 1927 that became famous for PC Magazine, Ziff Davis (NASDAQ:ZD) operates a portfolio of digital media brands and subscription services across technology, shopping, gaming, healthcare, and cybersecurity markets.
Why Do We Think ZD Will Underperform?
- Sales were flat over the last five years, indicating it’s failed to expand this cycle
- Performance over the past five years shows each sale was less profitable, as its earnings per share fell by 4.1% annually
- Free cash flow margin shrank by 9.3 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
Ziff Davis is trading at $47.53 per share, or 6.6x forward P/E. Dive into our free research report to see why there are better opportunities than ZD.
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