Business services providers thrive by solving complex operational challenges for their clients, allowing them to focus on their secret sauce. Furthermore, the demand for their offerings is rising as more clients outsource non-core functions, a trend that has enabled the industry to return 20.3% over the past six months. At the same time, the S&P 500 was up 12.3%.
Nevertheless, investors should tread carefully as many companies in this space are cyclical due to their reliance on corporate spending budgets. With that said, here is one resilient services stock at the top of our wish list and two we would avoid.
Two Business Services Stocks to Sell:
Benchmark (BHE)
Market Cap: $2.56 billion
Operating as a critical behind-the-scenes partner for complex technology products since 1979, Benchmark Electronics (NYSE:BHE) provides advanced manufacturing, engineering, and technology solutions for original equipment manufacturers across aerospace, medical, industrial, and technology sectors.
Why Are We Hesitant About BHE?
- Muted 1.2% annual revenue growth over the last two years shows its demand lagged behind its business services peers
- Poor free cash flow margin of 0.9% for the last five years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
- Underwhelming 7.4% return on capital reflects management’s difficulties in finding profitable growth opportunities, and its shrinking returns suggest its past profit sources are losing steam
Benchmark’s stock price of $73.91 implies a valuation ratio of 23.1x forward P/E. To fully understand why you should be careful with BHE, check out our full research report (it’s free).
ABM (ABM)
Market Cap: $2.77 billion
With roots dating back to 1909 as a window washing company, ABM Industries (NYSE:ABM) provides integrated facility management, infrastructure, and mobility solutions across various sectors including commercial, manufacturing, education, and aviation.
Why Does ABM Fall Short?
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- Earnings per share have contracted by 1.4% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance
- Low free cash flow margin of 1.7% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
ABM is trading at $47.20 per share, or 11.5x forward P/E. Read our free research report to see why you should think twice about including ABM in your portfolio.
One Business Services Stock to Buy:
OSI Systems (OSIS)
Market Cap: $3.29 billion
With security scanners deployed at airports and borders worldwide and patient monitors used in hospitals across the globe, OSI Systems (NASDAQ:OSIS) designs and manufactures specialized electronic systems for security screening, patient monitoring, and optoelectronic applications.
Why Should You Buy OSIS?
- Annual revenue growth of 9.3% over the past five years was outstanding, reflecting market share gains this cycle
- Share buybacks catapulted its annual earnings per share growth to 14.3%, which outperformed its revenue gains over the last five years
- Free cash flow margin expanded by 20.4 percentage points over the last five years, providing additional flexibility for investments and share buybacks/dividends
At $206.63 per share, OSI Systems trades at 18.5x forward P/E. Is now the time to initiate a position? See for yourself in our comprehensive research report, it’s free.
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