3 Services Stocks Walking a Fine Line

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 30.2% gain over the past six months, beating the S&P 500 by 4.7 percentage points.

Nevertheless, investors should tread carefully as many companies in this space are cyclical due to their reliance on corporate spending budgets. On that note, here are three services stocks best left ignored.

Telephone and Data Systems (TDS)

Market Cap: $4.42 billion

Operating primarily through its majority-owned subsidiary UScellular and wholly-owned TDS Telecom, Telephone and Data Systems (NYSE:TDS) provides wireless, broadband, video, and voice communications services to 4.6 million wireless and 1.2 million broadband customers across the United States.

Why Do We Pass on TDS?

1. Customers postponed purchases of its products and services this cycle as its revenue declined by 1.5% annually over the last five years
2. Earnings per share have dipped by 17% annually over the past five years, which is concerning because stock prices follow EPS over the long term
3. 20× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings

Telephone and Data Systems’s stock price of $38.53 implies a valuation ratio of 7.3x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why TDS doesn’t pass our bar.

PAR Technology (PAR)

Market Cap: $1.41 billion

Originally founded in 1968 as a defense contractor for the U.S. government, PAR Technology (NYSE:PAR) provides cloud-based software, payment processing, and hardware solutions that help restaurants manage everything from point-of-sale to customer loyalty programs.

Why Are We Wary of PAR?

1. Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
2. Push for growth has led to negative returns on capital, signaling value destruction
3. Short cash runway increases the probability of a capital raise that dilutes existing shareholders

At $34.51 per share, PAR Technology trades at 153.8x forward P/E. If you’re considering PAR for your portfolio, see our FREE research report to learn more.

CoStar (CSGP)

Market Cap: $31.5 billion

With a research department that makes over 10,000 property updates daily to its 35-year-old database, CoStar Group (NASDAQ:CSGP) provides comprehensive real estate data, analytics, and online marketplaces for commercial and residential properties in the U.S. and U.K.

Why Are We Cautious About CSGP?

1. Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 3.9% annually
2. Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 15.8 percentage points
3. Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value

CoStar is trading at $74.15 per share, or 68.5x forward P/E. Dive into our free research report to see why there are better opportunities than CSGP.

Stocks We Like More

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