Business services providers thrive by solving complex operational challenges for their clients, allowing them to focus on their secret sauce. But increasing competition from AI-driven upstarts has tempered enthusiasm, limiting the industry’s gains to 15.4% over the past six months. This return lagged the S&P 500’s 18.6% climb.
A cautious approach is imperative when dabbling in these companies as many are also sensitive to the ebbs and flows of the broader economy. On that note, here are three services stocks we’re passing on.
Wiley (WLY)
Market Cap: $1.94 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 Think WLY Will Underperform?
- Sales tumbled by 1.9% annually over the last five years, showing market trends are working against its favor during this cycle
- Earnings per share have dipped by 1.3% annually over the past two years, which is concerning because stock prices follow EPS over the long term
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 7.3 percentage points
Wiley’s stock price of $36.80 implies a valuation ratio of 5.4x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than WLY.
ICF International (ICFI)
Market Cap: $1.50 billion
Operating at the intersection of policy, technology, and implementation for over five decades, ICF International (NASDAQ: ICFI) provides professional consulting services and technology solutions to government agencies and commercial clients across energy, health, environment, and security sectors.
Why Do We Steer Clear of ICFI?
- Sales pipeline suggests its future revenue growth won’t meet our standards as its backlog averaged 2.9% declines over the past two years
- Projected sales decline of 2.6% for the next 12 months points to an even tougher demand environment ahead
- Low returns on capital reflect management’s struggle to allocate funds effectively
At $81.69 per share, ICF International trades at 12x forward P/E. If you’re considering ICFI for your portfolio, see our FREE research report to learn more.
Cisco (CSCO)
Market Cap: $279.9 billion
Founded in 1984 by a husband and wife team who wanted computers at Stanford to talk to computers at UC Berkeley, Cisco (NASDAQ: CSCO) designs and sells networking equipment, security solutions, and collaboration tools that help businesses connect their systems and secure their digital operations.
Why Are We Cautious About CSCO?
- Sales were flat over the last two years, indicating it’s failed to expand this cycle
- Free cash flow margin dropped by 6.2 percentage points over the last five years, implying the company became more capital intensive as competition picked up
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
Cisco is trading at $70.88 per share, or 17.6x forward P/E. Check out our free in-depth research report to learn more about why CSCO doesn’t pass our bar.
Stocks We Like More
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