Business services providers use their specialized expertise to help enterprises streamline operations and cut costs. Still, investors are uneasy as firms face challenges from AI-driven disruptors and tightening corporate budgets. These doubts have caused the industry to lag recently as services stocks have collectively shed 8.6% over the past six months. This drawdown was disappointing since the S&P 500 held steady.
The elite companies can churn out earnings growth under any circumstance, however, and our mission at StockStory is to help you find them. On that note, here is one services stock poised to generate sustainable market-beating returns and two we’re passing on.
Two Business Services Stocks to Sell:
Sinclair (SBGI)
Market Cap: $948.2 million
With over 2,400 hours of local news produced weekly and 640 broadcast channels reaching millions of American homes, Sinclair (NASDAQ: SBGI) operates a network of 185 local television stations across 86 U.S. markets, producing news programming and distributing content from major networks.
Why Are We Out on SBGI?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 11.8% annually over the last five years
- Eroding returns on capital suggest its historical profit centers are aging
- High net-debt-to-EBITDA ratio of 8× increases the risk of forced asset sales or dilutive financing if operational performance weakens
Sinclair’s stock price of $13.25 implies a valuation ratio of 18.4x forward P/E. To fully understand why you should be careful with SBGI, check out our full research report (it’s free).
Viasat (VSAT)
Market Cap: $6.30 billion
Operating a fleet of 23 satellites that orbit the Earth and beam connectivity from space, Viasat (NASDAQ: VSAT) provides satellite-based communications networks and services for airlines, maritime vessels, governments, businesses, and residential customers worldwide.
Why Is VSAT Not Exciting?
- Issuance of new shares over the last five years caused its earnings per share to fall by 2.6% annually while its revenue grew
- Negative free cash flow raises questions about the return timeline for its investments
- Negative returns on capital show that some of its growth strategies have backfired
At $46.79 per share, Viasat trades at 80.2x forward P/E. Read our free research report to see why you should think twice about including VSAT in your portfolio.
One Business Services Stock to Buy:
Fair Isaac Corporation (FICO)
Market Cap: $26.75 billion
Creator of the three-digit number that can determine whether you get a mortgage or credit card, Fair Isaac Corporation (NYSE: FICO) develops analytics software and the widely used FICO Score, which is the standard measure of consumer credit risk in the United States.
Why Will FICO Beat the Market?
- Performance over the past two years was turbocharged by share buybacks, which enabled its earnings per share to grow faster than its revenue
- Strong free cash flow margin of 34.8% enables it to reinvest or return capital consistently
- Improving returns on capital reflect management’s ability to monetize investments
Fair Isaac Corporation is trading at $1,133 per share, or 24.7x forward P/E. Is now the time to initiate a position? Find out in our full research report, it’s free.
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