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 19.8% over the past six months. At the same time, the S&P 500 was up 11.7%.
Nevertheless, investors should tread carefully as many companies in this space are cyclical due to their reliance on corporate spending budgets. Taking that into account, here are two services stocks we think can generate sustainable market-beating returns and one we’re steering clear of.
One Business Services Stock to Sell:
Jacobs Solutions (J)
Market Cap: $17.27 billion
With a workforce of approximately 45,000 professionals tackling complex challenges from water scarcity to cybersecurity, Jacobs Solutions (NYSE:J) provides engineering, consulting, and technical services focused on infrastructure, sustainability, and advanced technology solutions.
Why Do We Pass on J?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 6.2% annually over the last five years
- Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term
- Low returns on capital reflect management’s struggle to allocate funds effectively
Jacobs Solutions’s stock price of $147.56 implies a valuation ratio of 18.4x forward P/E. Dive into our free research report to see why there are better opportunities than J.
Two Business Services Stocks to Buy:
EXL (EXLS)
Market Cap: $5.66 billion
Originally founded as an outsourcing company in 1999 before evolving into a technology-focused enterprise, EXL (NASDAQ:EXLS) provides data analytics and AI-powered digital operations solutions that help businesses transform their operations and make better decisions.
Why Do We Love EXLS?
- Annual revenue growth of 16.9% over the last five years was superb and indicates its market share increased during this cycle
- Market share will likely rise over the next 12 months as its expected revenue growth of 14.3% is robust
- Share repurchases over the last five years enabled its annual earnings per share growth of 19% to outpace its revenue gains
EXL is trading at $37.33 per share, or 15.4x forward P/E. Is now a good time to buy? See for yourself in our full research report, it’s free.
IMAX (IMAX)
Market Cap: $2.85 billion
Originally developed for World Expo '67 in Montreal as an innovative projection system, IMAX (NYSE:IMAX) provides proprietary large-format cinema technology and systems that deliver immersive movie experiences with enhanced image quality and sound.
Why Is IMAX a Good Business?
- Annual revenue growth of 17.9% over the past five years was outstanding, reflecting market share gains this cycle
- Free cash flow margin expanded by 24.8 percentage points over the last five years, providing additional flexibility for investments and share buybacks/dividends
- Rising returns on capital show the company is starting to reap the benefits of its past investments
At $51.95 per share, IMAX trades at 25.6x forward P/E. Is now the right time to buy? Find out in our full research report, it’s free.
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