Business services providers thrive by solving complex operational challenges for their clients, allowing them to focus on their secret sauce. Furthermore, the demand for their offerings is rising as more clients outsource non-core functions, a trend that has enabled the industry to return 6.8% over the past six months. At the same time, the S&P 500 was up 3.6%.

Nevertheless, investors should tread carefully as many companies in this space are cyclical due to their reliance on corporate spending budgets. Taking that into account, here are three services stocks we’re swiping left on.

Steelcase (SCS)

Market Cap: $1.33 billion

Founded in 1912 and evolving from a metal office furniture maker to a workplace innovation leader, Steelcase (NYSE:SCS) is a global office furniture manufacturer that designs and produces workplace solutions including seating, desks, storage, and architectural products.

Why Do We Avoid SCS?

1. Annual sales declines of 3.1% for the past five years show its products and services struggled to connect with the market during this cycle
2. Sales were less profitable over the last five years as its earnings per share fell by 5.2% annually, worse than its revenue declines
3. Low returns on capital reflect management’s struggle to allocate funds effectively

Steelcase is trading at $11.34 per share, or 10.8x forward price-to-earnings. Dive into our free research report to see why there are better opportunities than SCS.

EPAM (EPAM)

Market Cap: $11.31 billion

Founded during the early days of post-Soviet economic transition in 1993, EPAM Systems (NYSE:EPAM) provides digital engineering, cloud and AI-enabled transformation services to help global enterprises and startups modernize their technology and business operations.

Why Are We Wary of EPAM?

1. Constant currency revenue growth has disappointed over the past two years and shows demand was soft
2. 6.7 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
3. Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability

EPAM’s stock price of $197.30 implies a valuation ratio of 17.7x forward price-to-earnings. To fully understand why you should be careful with EPAM, check out our full research report (it’s free).

Kyndryl (KD)

Market Cap: $8.26 billion

Born from IBM's managed infrastructure services business in a 2021 spinoff, Kyndryl Holdings (NYSE:KD) is the world's largest IT infrastructure services provider that designs, builds, and manages technology environments for enterprise customers.

Why Are We Hesitant About KD?

1. Annual sales declines of 5.9% for the past four years show its products and services struggled to connect with the market during this cycle
2. Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
3. Negative returns on capital show management lost money while trying to expand the business

At $34.98 per share, Kyndryl trades at 18.6x forward price-to-earnings. Check out our free in-depth research report to learn more about why KD doesn’t pass our bar.

Stocks We Like More

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