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 6.3% over the past six months. This drop was disappointing since the S&P 500 stood firm.

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. Keeping that in mind, here are three services stocks that may face trouble.

UniFirst (UNF)

Market Cap: $3.49 billion

With a fleet of trucks making weekly deliveries to over 300,000 customer locations, UniFirst (NYSE: UNF) provides, rents, cleans, and maintains workplace uniforms and protective clothing for businesses across various industries.

Why Do We Avoid UNF?

1. Demand is forecasted to shrink as its estimated sales for the next 12 months are flat
2. Incremental sales over the last five years were much less profitable as its earnings per share fell by 2.7% annually while its revenue grew
3. Low returns on capital reflect management’s struggle to allocate funds effectively, and its falling returns suggest its earlier profit pools are drying up

At $187.84 per share, UniFirst trades at 23.2x forward P/E. Dive into our free research report to see why there are better opportunities than UNF.

Iridium (IRDM)

Market Cap: $2.79 billion

With a constellation of 66 low-earth orbit satellites providing coverage to every inch of the planet, Iridium Communications (NASDAQ: IRDM) operates a global satellite network that provides voice and data services to customers in remote areas where traditional telecommunications are unavailable.

Why Does IRDM Fall Short?

1. Modest revenue base of $841.7 million gives it less fixed cost leverage and fewer distribution channels than larger companies
2. Free cash flow margin dropped by 3.2 percentage points over the last five years, implying the company became more capital intensive as competition picked up
3. Low returns on capital reflect management’s struggle to allocate funds effectively

Iridium’s stock price of $25.75 implies a valuation ratio of 17.6x forward P/E. Check out our free in-depth research report to learn more about why IRDM doesn’t pass our bar.

TransUnion (TRU)

Market Cap: $17.64 billion

One of the three major credit bureaus in the United States alongside Equifax and Experian, TransUnion (NYSE: TRU) is a global information and insights company that provides credit reports, fraud prevention tools, and data analytics to help businesses make decisions and consumers manage their financial health.

Why Is TRU Not Exciting?

1. Costs have risen faster than its revenue over the last five years, causing its adjusted operating margin to decline by 2 percentage points
2. Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 10.1 percentage points
3. Below-average returns on capital indicate management struggled to find compelling investment opportunities, and its shrinking returns suggest its past profit sources are losing steam

TransUnion is trading at $90.39 per share, or 21.5x forward P/E. To fully understand why you should be careful with TRU, check out our full research report (it’s free).

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