Business services providers play a critical role for enterprises, assisting them with everything from new hardware integrations to consulting and marketing. These firms have helped their customers unlock huge efficiencies, so it’s no surprise the industry has posted a 9.4% gain over the past six months, beating the S&P 500 by 4.9 percentage points.
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 would avoid.
One business services stock to sell:
Cognex (CGNX)
Market cap: $8.00 billion
Founded in 1981 when computer vision was in its infancy, Cognex (NASDAQ: CGNX) develops machine vision systems and software that help manufacturers and logistics companies automate quality inspection and tracking of products.
Why Is CGNX Not Exciting?
- 2.1% annual revenue growth over the last five years was slower than its business services peers
- Subscale operations are evident in its revenue base of $1.13 billion, meaning it has fewer distribution channels than its larger rivals
- Earnings growth over the last five years fell short of the peer group average as its EPS only increased by 1% annually
Cognex’s stock price of $48.25 implies a valuation ratio of 27.6x forward P/E. Dive into our free research report to see why there are better opportunities than CGNX.
Two business services stocks to watch:
MSA Safety (MSA)
Market cap: $6.55 billion
Founded in 1914 as Mine Safety Appliances to protect coal miners from dangerous gases, MSA Safety (NYSE: MSA) designs and manufactures advanced safety products that protect workers and facilities across industries including fire service, energy, construction, and manufacturing.
Why Do We Like MSA?
- Offerings and unique value proposition resonate with customers, as seen in its above-market 7.9% annual sales growth over the last five years
- Share repurchases have amplified shareholder returns as its annual earnings per share growth of 16% exceeded its revenue gains over the last five years
- Free cash flow margin expanded by 7.2 percentage points over the last five years, providing additional flexibility for investments and share buybacks/dividends
At $170.80 per share, MSA Safety trades at 18.3x forward P/E. Is now a good time to buy? See for yourself in our in-depth research report, it’s free.
NetApp (NTAP)
Market cap: $33.27 billion
Founded in 1992 as a pioneer in networked storage technology, NetApp (NASDAQ: NTAP) provides data storage and management solutions that help organizations store, protect, and optimize their data across on-premises data centers and public clouds.
Why Is NTAP a Good Business?
- Average billings growth of 10.4% over the past two years enhances its liquidity and shows there is steady demand for its products
- Share repurchases over the last five years enabled its annual earnings per share growth of 15.5% to outpace its revenue gains
- Strong free cash flow margin of 20.6% enables it to reinvest or return capital consistently, and its rising cash conversion increases its margin of safety
NetApp is trading at $171.13 per share, or 18.8x forward P/E. Is now the right time to buy? Find out in our full research report, it’s free.
Stocks we like even more
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