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 23.2% over the past six months. At the same time, the S&P 500 was up 14.3%.
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. With that said, here is one services stock poised to generate sustainable market-beating returns and two best left ignored.
Two Business Services Stocks to Sell:
MillerKnoll (MLKN)
Market Cap: $1.43 billion
Created through the 2021 merger of industry icons Herman Miller and Knoll, MillerKnoll (NASDAQ: MLKN) designs, manufactures, and distributes interior furnishings for offices, healthcare facilities, educational settings, and homes worldwide.
Why Is MLKN Risky?
- Annual revenue growth of 3.3% over the last two years was below our standards for the business services sector
- Issuance of new shares over the last five years caused its earnings per share to fall by 5.6% annually while its revenue grew
- Low free cash flow margin of 2.7% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
MillerKnoll is trading at $20.77 per share, or 10.7x forward P/E. To fully understand why you should be careful with MLKN, check out our full research report (it’s free).
CDW (CDW)
Market Cap: $17.49 billion
Serving as a crucial bridge between technology manufacturers and end users since 1984, CDW (NASDAQ: CDW) is a multi-brand provider of information technology solutions that helps businesses and public sector organizations select, implement, and manage hardware, software, and IT services.
Why Does CDW Give Us Pause?
- Scale is a double-edged sword because it limits the company’s growth potential compared to its smaller competitors, as reflected in its below-average annual revenue increases of 3.6% for the last five years
- Estimated sales growth of 4% for the next 12 months implies demand will slow from its two-year trend
- Annual earnings per share growth of 3.8% underperformed its revenue over the last two years, showing its incremental sales were less profitable
At $138.37 per share, CDW trades at 12x forward P/E. Read our free research report to see why you should think twice about including CDW in your portfolio.
One Business Services Stock to Watch:
MediaAlpha (MAX)
Market Cap: $565.8 million
Powering nearly 10 million consumer referrals each month in the insurance marketplace, MediaAlpha (NYSE: MAX) operates a technology platform that connects insurance carriers with high-intent consumers shopping for property, casualty, health, and life insurance products.
Why Are We Fans of MAX?
- Impressive 57% annual revenue growth over the last two years indicates it’s winning market share this cycle
- Forecasted revenue growth of 11.8% for the next 12 months indicates its momentum over the last two years is sustainable
- Earnings per share grew by 171% annually over the last two years, massively outpacing its peers
MediaAlpha’s stock price of $10.70 implies a valuation ratio of 7.4x 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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