1 Services Stock to Keep an Eye On and 2 We Find Risky

Business services providers use their specialized expertise to help enterprises streamline operations and cut costs. Still, investors are uneasy as firms face challenges from AI-driven disruptors and tightening corporate budgets. These doubts have certainly contributed to services stocks’ recent underperformance - over the past six months, the industry’s 14.6% gain has fallen behind the S&P 500’s 17.4% rise.

Only some companies are subject to these dynamics, however, and a handful of high-quality businesses can deliver earnings growth in any environment. 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:

Interface (TILE)

Market Cap: $1.60 billion

Pioneering carbon-neutral flooring since its founding in 1973, Interface (NASDAQ:TILE) is a global manufacturer of modular carpet tiles, luxury vinyl tile (LVT), and rubber flooring that specializes in carbon-neutral and sustainable flooring solutions.

Why Is TILE Not Exciting?

1. Muted 1.8% annual revenue growth over the last five years shows its demand lagged behind its business services peers
2. Earnings growth underperformed the sector average over the last five years as its EPS grew by just 1.9% annually
3. Below-average returns on capital indicate management struggled to find compelling investment opportunities

At $27.39 per share, Interface trades at 15x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why TILE doesn’t pass our bar.

Connection (CNXN)

Market Cap: $1.60 billion

Starting as a small computer products seller in 1982 and evolving into a Fortune 1000 company, Connection (NASDAQ:CNXN) is a technology solutions provider that helps businesses and government agencies design, purchase, implement, and manage their IT infrastructure and systems.

Why Is CNXN Risky?

1. Customers postponed purchases of its products and services this cycle as its revenue declined by 1.3% annually over the last two years
2. Earnings per share lagged its peers over the last two years as they only grew by 6.1% annually
3. Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 2.3% for the last five years

Connection is trading at $63.19 per share, or 17.4x forward P/E. Dive into our free research report to see why there are better opportunities than CNXN.

One Business Services Stock to Watch:

Iridium (IRDM)

Market Cap: $1.91 billion

With a constellation of 66 low-earth orbit satellites providing coverage to every inch of the planet, Iridium Communications (NASDAQ:IRDM) operates a global satellite network that provides voice and data services to customers in remote areas where traditional telecommunications are unavailable.

Why Are We Positive On IRDM?

1. Number of subscribers has surged, pointing to elevated demand
2. Performance over the past two years was turbocharged by share buybacks, which enabled its earnings per share to grow faster than its revenue
3. IRDM is a free cash flow machine with the flexibility to invest in growth initiatives or return capital to shareholders

Iridium’s stock price of $18.08 implies a valuation ratio of 13.8x forward P/E. Is now a good time to buy? Find out in our full research report, it’s free.

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