Services sector does it tough

Over the past year, the S&P / ASX 200 Index (Index:^AXJO) (ASX:XJO) has climbed more than 22%, not a bad return at all, but things aren’t so bright in the services sector.

United Group’s (ASX:UGL) shares have seen the biggest fall over the past twelve months, losing 43.6%. But shareholders could see some value emerge, if the company’s plans to spin off its property group come to fruition. United Group’s boss Richard Leupen also says things may have reached the bottom in the contracting industry with no big project cancellations or deferrals in the last six months.

Similarly, Transfield Services (ASX:TSE) has seen its shares lose close to half their value, ~49%. As part of the company’s strategy of cutting costs, more than 600 middle managers have been fired from the group’s total workforce of 3,000 in the past 18 months. Transfield has also faced a legal dispute with one of its subcontractors on the National Broadband Network (NBN) project, and then was forced to downgrade its profit forecasts in May this year.

Shareholders in Downer EDI (ASX:DOW) have seen the best performance out of the bunch, with shares rising 14.6%, still well below the index’s performance. Downer EDI chief executive Grant Fenn recently told analysts and investors that the group’s revenues in 2014 remained uncertain, and that the company would be forced to cut costs in a competitive market. Downer may have taken its bitter pill in 2010 and 2011, when it announced writedowns on its Waratah train project, and underwent a substantial restructuring.

Some analysts have suggested thing aren’t about to get any better either, with Simon Thakray at Nomura cautioning that contractors were heading into an extended downward cycle. With the resources boom slowing down, and new mining investment virtually at a standstill, it may be some time before the services industry sees light at the end of the tunnel.

Foolish takeaway

With thin margins, it doesn’t take much for services companies to swing from a profit to a loss. Foolish investors may want to give the sector a wide berth in the short-term, until things pick up again.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

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