Business services providers play a critical role for enterprises, assisting them with everything from new hardware integrations to consulting and marketing. Still, investors are uneasy as firms face challenges from AI-driven disruptors and tightening corporate budgets. These doubts have caused the industry to lag recently as services stocks have collectively shed 6.4% over the past six months. This drawdown was disappointing since the S&P 500 climbed 3.3%.

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. With that said, here are three services stocks we’re swiping left on.

DXC (DXC)

Market Cap: $2.30 billion

Born from the 2017 merger of Computer Sciences Corporation and HP Enterprise's services business, DXC Technology (NYSE: DXC) is a global IT services company that helps businesses transform their technology infrastructure, applications, and operations.

Why Should You Sell DXC?

1. Organic revenue growth fell short of our benchmarks over the past two years and implies it may need to improve its products, pricing, or go-to-market strategy
2. Earnings per share have dipped by 3.6% annually over the past five years, which is concerning because stock prices follow EPS over the long term
3. Underwhelming 1.2% return on capital reflects management’s difficulties in finding profitable growth opportunities, and its shrinking returns suggest its past profit sources are losing steam

DXC’s stock price of $13.04 implies a valuation ratio of 4.2x forward P/E. Read our free research report to see why you should think twice about including DXC in your portfolio.

Interpublic Group (IPG)

Market Cap: $8.88 billion

With a history dating back to 1902 and roots in the McCann-Erickson agency, Interpublic Group (NYSE: IPG) is a marketing and communications holding company that owns agencies specializing in advertising, media buying, public relations, and digital marketing services.

Why Are We Out on IPG?

1. Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
2. Sales are projected to be flat over the next 12 months and imply weak demand
3. Free cash flow margin shrank by 17.1 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive

Interpublic Group is trading at $24.24 per share, or 8.8x forward P/E. Dive into our free research report to see why there are better opportunities than IPG.

Xerox (XRX)

Market Cap: $495 million

Pioneering the modern office copier and inventing technologies like Ethernet and the laser printer, Xerox (NASDAQ: XRX) provides document management systems, printing technology, and workplace solutions to businesses of all sizes across the globe.

Why Is XRX Risky?

1. Sales tumbled by 4.9% annually over the last five years, showing market trends are working against its favor during this cycle
2. Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
3. 8× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings

At $4.02 per share, Xerox trades at 2.5x forward P/E. If you’re considering XRX for your portfolio, see our FREE research report to learn more.

Stocks We Like More

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