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, and over the past six months, the industry has pulled back by 6.3%. This drawdown was discouraging since the S&P 500 held steady.
A cautious approach is imperative when dabbling in these companies as many are also sensitive to the ebbs and flows of the broader economy. With that said, here are three services stocks we’re steering clear of.
Wiley (WLY)
Market Cap: $2.33 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 Should You Sell WLY?
- Annual sales declines of 1.6% for the past five years show its products and services struggled to connect with the market during this cycle
- Earnings per share were flat over the last two years and fell short of the peer group average
- 4.3 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
At $43.20 per share, Wiley trades at 17.9x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including WLY in your portfolio.
EPAM (EPAM)
Market Cap: $10.53 billion
Founded in 1993 during the early days of offshore software development, EPAM Systems (NYSE:EPAM) provides digital engineering, cloud, and AI transformation services to help global enterprises and startups modernize their technology systems and create digital products.
Why Does EPAM Worry Us?
- Constant currency growth was below our standards over the past two years, suggesting it might need to invest in product improvements to get back on track
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 7.3 percentage points
- Eroding returns on capital suggest its historical profit centers are aging
EPAM’s stock price of $185.89 implies a valuation ratio of 17.1x forward P/E. Check out our free in-depth research report to learn more about why EPAM doesn’t pass our bar.
Hewlett Packard Enterprise (HPE)
Market Cap: $23.28 billion
Born from the 2015 split of the iconic Silicon Valley pioneer Hewlett-Packard, Hewlett Packard Enterprise (NYSE:HPE) provides edge-to-cloud technology solutions that help businesses capture, analyze, and act upon their data across hybrid IT environments.
Why Does HPE Give Us Pause?
- Large revenue base makes it harder to increase sales quickly, and its annual revenue growth of 1.8% over the last five years was below our standards for the business services sector
- Revenue growth over the past two years was nullified by the company’s new share issuances as its earnings per share fell by 3.1% annually
- ROIC of 2.9% reflects management’s challenges in identifying attractive investment opportunities
Hewlett Packard Enterprise is trading at $17.65 per share, or 8.2x forward P/E. Dive into our free research report to see why there are better opportunities than HPE.
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