Business services providers thrive by solving complex operational challenges for their clients, allowing them to focus on their secret sauce. These firms have helped their customers unlock huge efficiencies, so it’s no surprise the industry has posted a 9.4% gain over the past six months, nearly mirrorring 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 two services stocks boasting durable advantages and one best left ignored.
One Business Services Stock to Sell:
ScanSource (SCSC)
Market Cap: $884.1 million
Operating as a crucial link in the technology supply chain since 1992, ScanSource (NASDAQ: SCSC) is a hybrid distributor that connects hardware, software, and cloud services from technology suppliers to resellers and business customers.
Why Are We Wary of SCSC?
- Annual sales declines of 4.9% for the past two years show its products and services struggled to connect with the market during this cycle
- Estimated sales growth of 2.4% for the next 12 months is soft and implies weaker demand
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
At $43.50 per share, ScanSource trades at 10x forward P/E. To fully understand why you should be careful with SCSC, check out our full research report (it’s free).
Two Business Services Stocks to Watch:
CRA (CRAI)
Market Cap: $909 million
Often retained for high-stakes matters with multibillion-dollar implications, CRA International (NASDAQ: CRAI) provides economic, financial, and management consulting services to corporations, law firms, and government agencies for litigation, regulatory proceedings, and business strategy.
Why Are We Fans of CRAI?
- Impressive 9.5% annual revenue growth over the last two years indicates it’s winning market share this cycle
- Share repurchases have amplified shareholder returns as its annual earnings per share growth of 15.5% exceeded its revenue gains over the last five years
- Industry-leading 18.4% return on capital demonstrates management’s skill in finding high-return investments
CRA is trading at $140.76 per share, or 15.9x forward P/E. Is now the time to initiate a position? Find out in our full research report, it’s free.
Marsh (MRSH)
Market Cap: $78.72 billion
With roots dating back to 1871 and a presence in over 130 countries, Marsh (NYSE: MRSH) is a global professional services firm that helps organizations manage risk, strategy, and workforce challenges through its four specialized businesses.
Why Should You Buy MRSH?
- Annual revenue growth of 9.3% over the past five years was outstanding, reflecting market share gains this cycle
- Dominant market position is represented by its $27.52 billion in revenue and gives it fixed cost leverage when sales grow
- Impressive free cash flow profitability enables the company to fund new investments or reward investors with share buybacks/dividends, and its rising cash conversion increases its margin of safety
Marsh’s stock price of $163.38 implies a valuation ratio of 15.2x forward P/E. Is now the right time to buy? See for yourself in our in-depth research report, it’s free.
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