Business services providers play a critical role for enterprises, assisting them with everything from new hardware integrations to consulting and marketing. Furthermore, the demand for their offerings is rising as more clients outsource non-core functions, a trend that has enabled the industry to return 13.2% over the past six months. At the same time, the S&P 500 was up 11.5%.
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 is one services stock poised to generate sustainable market-beating returns and two best left ignored.
Two Business Services Stocks to Sell:
Sinclair (SBGI)
Market Cap: $1.02 billion
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 Do We Think SBGI Will Underperform?
- Annual sales declines of 11.4% for the past five years show its products and services struggled to connect with the market during this cycle
- Eroding returns on capital suggest its historical profit centers are aging
- High net-debt-to-EBITDA ratio of 7× could force the company to raise capital at unfavorable terms if market conditions deteriorate
Sinclair’s stock price of $14.14 implies a valuation ratio of 0.3x forward price-to-sales. Check out our free in-depth research report to learn more about why SBGI doesn’t pass our bar.
Amentum (AMTM)
Market Cap: $5.68 billion
With operations spanning approximately 80 countries and a workforce of specialized engineers and technical experts, Amentum Holdings (NYSE: AMTM) provides advanced engineering and technology solutions to U.S. government agencies, allied governments, and commercial enterprises across defense, energy, and space sectors.
Why Does AMTM Fall Short?
- Annual sales growth of 1.1% over the last four years lagged behind its business services peers as its large revenue base made it difficult to generate incremental demand
- Anticipated sales growth of 1.6% for the next year implies demand will be shaky
- Poor free cash flow margin of 2.1% for the last five years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
At $23.35 per share, Amentum trades at 9.1x forward P/E. If you’re considering AMTM for your portfolio, see our FREE research report to learn more.
One Business Services Stock to Buy:
Mirion (MIR)
Market Cap: $4.63 billion
With its technology protecting workers in over 130 countries and equipment used in 80% of cancer centers worldwide, Mirion Technologies (NYSE: MIR) provides radiation detection, measurement, and monitoring solutions for medical, nuclear energy, defense, and scientific research applications.
Why Should You Buy MIR?
- Annual revenue growth of 10.8% over the past five years was outstanding, reflecting market share gains this cycle
- Adjusted operating margin expanded by 10.5 percentage points over the last five years as it scaled and became more efficient
- Free cash flow margin grew by 8.7 percentage points over the last five years, giving the company more chips to play with
Mirion is trading at $18.92 per share, or 4.6x trailing 12-month price-to-sales. Is now a good time to buy? Find out in our full research report, it’s free.
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