Business services providers thrive by solving complex operational challenges for their clients, allowing them to focus on their secret sauce. These firms have helped their customers unlock huge efficiencies, so it’s no surprise the industry has posted a 9.2% gain over the past six months, beating the S&P 500 by 2.4 percentage points.
Nevertheless, investors should tread carefully as many companies in this space are cyclical due to their reliance on corporate spending budgets. Keeping that in mind, here are three services stocks we’re passing on.
CoreCivic (CXW)
Market Cap: $2.66 billion
Originally founded in 1983 as the first private prison company in the United States, CoreCivic (NYSE: CXW) operates correctional facilities, detention centers, and residential reentry programs for government agencies across the United States.
Why Does CXW Worry Us?
- Sales trends were unexciting over the last five years as its 4.6% annual growth was below the typical business services company
- Expenses have increased as a percentage of revenue over the last five years as its adjusted operating margin fell by 3.2 percentage points
- Free cash flow margin shrank by 6.6 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
At $30.80 per share, CoreCivic trades at 18.1x forward P/E. To fully understand why you should be careful with CXW, check out our full research report (it’s free).
Ibotta (IBTA)
Market Cap: $734.8 million
Originally launched as a way to make grocery shopping more rewarding for budget-conscious consumers, Ibotta (NYSE: IBTA) is a mobile shopping app that allows consumers to earn cash back on everyday purchases by completing tasks and submitting receipts.
Why Is IBTA Not Exciting?
- 1.2% annual revenue growth over the last two years was slower than its business services peers
- Subscale operations are evident in its revenue base of $340.3 million, meaning it has fewer distribution channels than its larger rivals
- Falling earnings per share over the last one years has some investors worried as stock prices ultimately follow EPS over the long term
Ibotta is trading at $33.97 per share, or 19.6x forward P/E. Check out our free in-depth research report to learn more about why IBTA doesn’t pass our bar.
Robert Half (RHI)
Market Cap: $3.18 billion
With roots dating back to 1948 as the first specialized recruiting firm for accounting and finance professionals, Robert Half (NYSE: RHI) provides specialized talent solutions and business consulting services, connecting skilled professionals with companies across various fields.
Why Do We Avoid RHI?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 6.9% annually over the last two years
- Earnings per share fell by 14.8% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
- Waning returns on capital imply its previous profit engines are losing steam
Robert Half’s stock price of $31.74 implies a valuation ratio of 19.6x forward P/E. If you’re considering RHI for your portfolio, see our FREE research report to learn more.
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