3 Services Stocks We're Skeptical Of

Business services providers thrive by solving complex operational challenges for their clients, allowing them to focus on their secret sauce. These firms have helped their customers unlock huge efficiencies, so it’s no surprise the industry has posted a 19.8% gain over the past six months, nearly mirrorring the S&P 500.

Regardless of these results, investors must exercise caution as many companies in this space are sensitive to the ebbs and flows of the broader economy. Keeping that in mind, here are three services stocks we’re passing on.

Plexus (PLXS)

Market Cap: $3.87 billion

With over 20,000 team members across 26 global facilities, Plexus (NASDAQ:PLXS) designs, manufactures, and services complex electronic products for companies in aerospace/defense, healthcare, and industrial sectors.

Why Does PLXS Fall Short?

1. Products and services are facing significant end-market challenges during this cycle as sales have declined by 3.4% annually over the last two years
2. Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 2.7% for the last five years
3. Diminishing returns on capital suggest its earlier profit pools are drying up

Plexus is trading at $145.99 per share, or 19.3x forward P/E. If you’re considering PLXS for your portfolio, see our FREE research report to learn more.

Rogers (ROG)

Market Cap: $1.45 billion

With roots dating back to 1832, making it one of America's oldest continuously operating companies, Rogers (NYSE:ROG) designs and manufactures specialized engineered materials and components used in electric vehicles, telecommunications, renewable energy, and other high-performance applications.

Why Are We Out on ROG?

1. Sales stagnated over the last five years and signal the need for new growth strategies
2. Sales over the last five years were less profitable as its earnings per share fell by 15.3% annually while its revenue was flat
3. Free cash flow margin dropped by 8.7 percentage points over the last five years, implying the company became more capital intensive as competition picked up

Rogers’s stock price of $80.04 implies a valuation ratio of 28.4x forward P/E. Check out our free in-depth research report to learn more about why ROG doesn’t pass our bar.

Ingram Micro (INGM)

Market Cap: $4.89 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 Do We Steer Clear of INGM?

1. 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 2% for the last five years
2. Performance over the past two years shows its incremental sales were much less profitable, as its earnings per share fell by 14.5% annually
3. Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital

At $20.82 per share, Ingram Micro trades at 6.7x forward P/E. To fully understand why you should be careful with INGM, check out our full research report (it’s free).

Stocks We Like More

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