Business services providers use their specialized expertise to help enterprises streamline operations and cut costs. But increasing competition from AI-driven upstarts has tempered enthusiasm, and over the past six months, the industry has pulled back by 2.8%. This drawdown was disheartening since the S&P 500 gained 5.4%.
While some companies have durable competitive advantages that enable them to grow in any landscape, the odds aren’t great for the ones we’re analyzing today. On that note, here are three services stocks that may face trouble.
CTS (CTS)
Market Cap: $1.22 billion
With roots dating back to 1896 and a global manufacturing footprint, CTS (NYSE:CTS) designs and manufactures sensors, connectivity components, and actuators for aerospace, defense, industrial, medical, and transportation markets.
Why Do We Think Twice About CTS?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 5.7% annually over the last two years
- Smaller revenue base of $520.9 million means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
- Earnings per share have dipped by 4.5% annually over the past two years, which is concerning because stock prices follow EPS over the long term
CTS’s stock price of $41.40 implies a valuation ratio of 17.3x forward P/E. Dive into our free research report to see why there are better opportunities than CTS.
Steelcase (SCS)
Market Cap: $1.86 billion
Founded in 1912 when metal office furniture was replacing wooden alternatives, Steelcase (NYSE:SCS) is a global office furniture manufacturer that designs and produces workplace solutions including desks, chairs, architectural products, and services.
Why Should You Dump SCS?
- Sales stagnated over the last five years and signal the need for new growth strategies
- Flat earnings per share over the last five years lagged its peers
- Underwhelming 7.1% return on capital reflects management’s difficulties in finding profitable growth opportunities
Steelcase is trading at $16.18 per share, or 14.7x forward P/E. To fully understand why you should be careful with SCS, check out our full research report (it’s free).
Knowles (KN)
Market Cap: $1.77 billion
With roots dating back to 1946 and a focus on components that must perform flawlessly in critical situations, Knowles (NYSE:KN) designs and manufactures specialized electronic components like high-performance capacitors, microphones, and speakers for medical technology, defense, and industrial applications.
Why Are We Out on KN?
- Sales tumbled by 5.3% annually over the last five years, showing market trends are working against its favor during this cycle
- Revenue base of $563.1 million puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- Below-average returns on capital indicate management struggled to find compelling investment opportunities, and its falling returns suggest its earlier profit pools are drying up
At $20.58 per share, Knowles trades at 17x forward P/E. Dive into our free research report to see why there are better opportunities than KN.
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