ShiftPixy Inc (NASDAQ:PIXY), a USD$81.92M small-cap, is a professional services company operating in an industry, which generally follows the ups and downs of the economic cycle, as its services cater to various industries across different sectors. The professional service industry also depends on the activities of construction, financial and mining sectors as these create a large portion of its revenues. Professional services analysts are forecasting for the entire industry, a relatively muted growth of 9.89% in the upcoming year , and a strong near-term growth of 26.51% over the next couple of years. However, this rate came in below the growth rate of the US stock market as a whole. Is the professional servicess industry an attractive sector-play right now? Today, I will analyse the industry outlook, as well as evaluate whether PIXY is lagging or leading its competitors in the industry. Check out our latest analysis for ShiftPixy
What’s the catalyst for PIXY’s sector growth?
High market competition, predominantly from new entrants into the service industry, has led to a faster-changing business environment. Since revenues are generated primarily from project-work with clients from external companies, the lumpiness of revenues is driven by the activities of other sectors. In the past year, the industry delivered growth in the teens, though still underperforming the wider US stock market. Given the lack of analyst consensus in PIXY’s outlook, we could potentially assume the stock’s growth rate broadly follows its professional services industry peers. This means it is an attractive growth stock relative to the wider US stock market.
Is PIXY and the sector relatively cheap?
Professional services companies are typically trading at a PE of 25x, in-line with the US stock market PE of 22x. This means the industry, on average, is fairly valued compared to the wider market – minimal expected gains and losses from mispricing here. However, the industry returned a higher 12.83% compared to the market’s 10.06%, potentially illustrative of past tailwinds. Since PIXY’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge PIXY’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? Professional services stocks are currently expected to grow slower than the average stock on the index. This means if you’re overweight in this sector, your portfolio will be tilted towards lower-growth. If growth was one of your main investment catalyst in the sector, now would be the time to revisit your holdings in PIXY. Keep in mind the sector is trading relatively in-line with the rest of the market, which may mean you’ll be selling out at a reasonable price.
Are you a potential investor? The services sector’s below-market growth and average valuation hardly makes it an exciting investment case. If you’re looking for a high-growth stock with potential mispricing, it seems like professional services companies like PIXY isn’t the right place to look. However, if you’re interested in the stock for other reasons, I suggest you research more into the company’s cash flow as well as its financial health in order to gain a holistic view of the stock.
For a deeper dive into ShiftPixy’s stock, take a look at the company’s latest free analysis report to find out more on its financial health and other fundamentals. Interested in other service stocks instead? Use our free playform to see my list of over 100 other service companies trading on the market.