1 Services Stock to Own for Decades and 2 Facing Challenges

Business services providers play a critical role for enterprises, assisting them with everything from new hardware integrations to consulting and marketing. But cutbacks in corporate spending and the threat of new AI products have kept sentiment in check, and over the past six months, the industry has tumbled by 3.1%. This drop was discouraging since the S&P 500 returned 5.7%.

Only some companies are subject to these dynamics, however, and a handful of high-quality businesses can deliver earnings growth in any environment. Taking that into account, here is one services stock boasting a durable advantage and two that may face trouble.

Two Business Services Stocks to Sell:

MillerKnoll (MLKN)

Market Cap: $1.29 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 Do We Avoid MLKN?

1. Customers postponed purchases of its products and services this cycle as its revenue declined by 5.2% annually over the last two years
2. Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 5.4 percentage points
3. 7× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings

MillerKnoll’s stock price of $18.62 implies a valuation ratio of 9.7x forward P/E. If you’re considering MLKN for your portfolio, see our FREE research report to learn more.

Ingram Micro (INGM)

Market Cap: $4.63 billion

Operating as the crucial link in the global technology supply chain with a presence in 57 countries, Ingram Micro (NYSE:INGM) is a global technology distributor that connects manufacturers with resellers, providing hardware, software, cloud services, and logistics expertise.

Why Are We Out on INGM?

1. Sales were flat over the last two years, indicating it’s failed to expand this cycle
2. Earnings per share fell by 9.8% annually over the last two years while its revenue was flat, showing each sale was less profitable
3. Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 0.5% for the last five years

Ingram Micro is trading at $19.72 per share, or 6.5x forward P/E. To fully understand why you should be careful with INGM, check out our full research report (it’s free).

One Business Services Stock to Buy:

ADP (ADP)

Market Cap: $125.4 billion

Processing one out of every six paychecks in the United States, ADP (NASDAQ:ADP) provides cloud-based human capital management solutions that help businesses manage payroll, benefits, talent acquisition, and HR administration.

Why Is ADP a Good Business?

1. Annual revenue growth of 7.1% over the last five years beat the sector average and underscores the unique value of its offerings
2. ADP is a free cash flow machine with the flexibility to invest in growth initiatives or return capital to shareholders, and its rising cash conversion increases its margin of safety
3. Returns on capital are growing as management capitalizes on its market opportunities

At $309.55 per share, ADP trades at 28.4x forward P/E. Is now the right time to buy? Find out in our full research report, it’s free.

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