3 Services Stocks with Warning Signs

Business services providers thrive by solving complex operational challenges for their clients, allowing them to focus on their secret sauce. 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’s 11% return has trailed the S&P 500 by 4.4 percentage points.

A cautious approach is imperative when dabbling in these companies as many are also sensitive to the ebbs and flows of the broader economy. On that note, here are three services stocks best left ignored.

Amentum (AMTM)

Market Cap: $5.45 billion

With operations spanning approximately 80 countries and a workforce of specialized engineers and technical experts, Amentum Holdings (NYSE:AMTM) provides advanced engineering and technology solutions to U.S. government agencies, allied governments, and commercial enterprises across defense, energy, and space sectors.

Why Are We Hesitant About AMTM?

1. Large revenue base makes it harder to increase sales quickly, and its annual revenue growth of 3.8% over the last two years was below our standards for the business services sector
2. Sales are projected to remain flat over the next 12 months as demand decelerates from its two-year trend
3. Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital

Amentum’s stock price of $23.27 implies a valuation ratio of 9.7x forward P/E. Read our free research report to see why you should think twice about including AMTM in your portfolio.

Flex (FLEX)

Market Cap: $23.16 billion

Originally known as Flextronics until its 2016 rebranding, Flex (NASDAQ:FLEX) is a global manufacturing partner that designs, engineers, and builds products for companies across industries from medical devices to solar trackers.

Why Is FLEX Not Exciting?

1. Sales tumbled by 3.1% annually over the last two years, showing market trends are working against its favor during this cycle
2. Poor free cash flow margin of 2.8% for the last five years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
3. Waning returns on capital imply its previous profit engines are losing steam

Flex is trading at $62.67 per share, or 18.9x forward P/E. To fully understand why you should be careful with FLEX, check out our full research report (it’s free for active Edge members).

Gartner (IT)

Market Cap: $16.62 billion

With over 2,500 research experts guiding organizations through complex technology landscapes, Gartner (NYSE:IT) provides research, advisory services, and conferences that help executives make better decisions about technology and other business priorities.

Why Are We Wary of IT?

1. Estimated sales growth of 2.7% for the next 12 months implies demand will slow from its two-year trend
2. Costs have risen faster than its revenue over the last five years, causing its adjusted operating margin to decline by 4.4 percentage points
3. Free cash flow margin dropped by 9.3 percentage points over the last five years, implying the company became more capital intensive as competition picked up

At $230.57 per share, Gartner trades at 17.6x forward P/E. Dive into our free research report to see why there are better opportunities than IT.

Stocks We Like More

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