Business services providers use their specialized expertise to help enterprises streamline operations and cut costs. Market leaders have certainly capitalized on outsourcing trends and digital transformation initiatives to boost sales, helping fuel a 7.2% gain for the industry over the past six months. This performance has closely followed the S&P 500.
Although these companies have produced results, only a handful will thrive over the long term as AI-driven upstarts are rapidly taking share from the incumbents. Taking that into account, here are two services stocks we think can generate sustainable market-beating returns and one we’re passing on.
One Business Services Stock to Sell:
Avnet (AVT)
Market Cap: $7.13 billion
With a century-long history of adapting to technological evolution, Avnet (NASDAQ: AVT) is a global electronic components distributor that connects manufacturers of semiconductors and other electronic parts with businesses that need these components.
Why Do We Think Twice About AVT?
- Flat sales over the last two years suggest it must find different ways to grow during this cycle
- Earnings per share fell by 17.7% annually over the last two years while its revenue was flat, showing each sale was less profitable
- Poor free cash flow margin of -0.2% for the last five years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
At $86.94 per share, Avnet trades at 11.5x forward P/E. If you’re considering AVT for your portfolio, see our FREE research report to learn more.
Two Business Services Stocks to Buy:
Brady (BRC)
Market Cap: $3.60 billion
Founded in 1914 and evolving through more than a century of industrial innovation, Brady (NYSE: BRC) manufactures and supplies identification solutions and workplace safety products that help companies identify and protect their premises, products, and people.
Why Are We Backing BRC?
- Annual revenue growth of 9.9% over the past two years was outstanding, reflecting market share gains this cycle
- Demand for the next 12 months is expected to accelerate above its two-year trend as Wall Street forecasts robust revenue growth of 30%
- Performance over the past five years was turbocharged by share buybacks, which enabled its earnings per share to grow faster than its revenue
Brady’s stock price of $76.75 implies a valuation ratio of 13x forward P/E. Is now the time to initiate a position? See for yourself in our comprehensive research report, it’s free.
Hewlett Packard Enterprise (HPE)
Market Cap: $63.92 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 Will HPE Beat the Market?
- ARR trends over the past two years show it’s maintaining a steady flow of long-term contracts that contribute positively to its revenue predictability
- Unparalleled revenue scale of $38.79 billion gives it an edge in distribution
- Market share is on track to rise over the next 12 months as its 25.3% projected revenue growth implies demand will accelerate from its two-year trend
Hewlett Packard Enterprise is trading at $47.70 per share, or 12.9x forward P/E. Is now the right time to buy? Find out in our full research report, it’s free.
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