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 12.8% over the past six months. This drawdown was worse than the S&P 500’s 10% decline.

A cautious approach is imperative when dabbling in these companies as many are also sensitive to the ebbs and flows of the broader economy. Keeping that in mind, here are three services stocks that may face trouble.

CoreCivic (CXW)

Market Cap: $2.43 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 Do We Steer Clear of CXW?

1. Number of average available beds has disappointed over the past two years, indicating weak demand for its offerings
2. Performance over the past two years shows its incremental sales were much less profitable, as its earnings per share fell by 22.8% annually
3. Free cash flow margin dropped by 8 percentage points over the last five years, implying the company became more capital intensive as competition picked up

CoreCivic’s stock price of $22.19 implies a valuation ratio of 22.2x forward price-to-earnings. If you’re considering CXW for your portfolio, see our FREE research report to learn more.

Diebold Nixdorf (DBD)

Market Cap: $1.58 billion

With roots dating back to 1859 and a presence in over 100 countries, Diebold Nixdorf (NYSE: DBD) provides automated self-service technology, software, and services that help banks and retailers digitize their customer transactions.

Why Are We Wary of DBD?

1. Sales tumbled by 3.2% annually over the last five years, showing market trends are working against its favor during this cycle
2. Projected sales are flat for the next 12 months, implying demand will slow from its two-year trend
3. Cash-burning tendencies make us wonder if it can sustainably generate shareholder value

At $41.90 per share, Diebold Nixdorf trades at 8.5x forward price-to-earnings. Read our free research report to see why you should think twice about including DBD in your portfolio.

IMAX (IMAX)

Market Cap: $1.19 billion

Originally developed for World Expo '67 in Montreal as an innovative projection system, IMAX (NYSE: IMAX) provides proprietary large-format cinema technology and systems that deliver immersive movie experiences with enhanced image quality and sound.

Why Does IMAX Worry Us?

1. Products and services are facing significant end-market challenges during this cycle as sales have declined by 2.3% annually over the last five years
2. Falling earnings per share over the last five years has some investors worried as stock prices ultimately follow EPS over the long term
3. Poor free cash flow margin of -0.6% for the last five years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends

IMAX is trading at $22.45 per share, or 16.8x forward price-to-earnings. To fully understand why you should be careful with IMAX, check out our full research report (it’s free).

Stocks We Like More

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