Business services providers play a critical role for enterprises, assisting them with everything from new hardware integrations to consulting and marketing. These firms have helped their customers unlock huge efficiencies, so it’s no surprise the industry has posted a 14.3% gain over the past six months, nearly mirrorring the S&P 500.
Although these companies have produced results, only a handful will thrive over the long term as AI-driven upstarts are rapidly taking share from the incumbents. Keeping that in mind, here are three services stocks we’re steering clear of.
IBM (IBM)
Market Cap: $262.2 billion
With a corporate history spanning over a century and once known for its iconic mainframe computers, IBM (NYSE: IBM) provides hybrid cloud computing platforms, AI solutions, consulting services, and enterprise infrastructure to help businesses modernize their operations.
Why Are We Wary of IBM?
- Sales stagnated over the last five years and signal the need for new growth strategies
- Earnings growth over the last five years fell short of the peer group average as its EPS only increased by 3.3% annually
- Low returns on capital reflect management’s struggle to allocate funds effectively
At $281.70 per share, IBM trades at 24.8x forward P/E. To fully understand why you should be careful with IBM, check out our full research report (it’s free).
Barrett (BBSI)
Market Cap: $1.13 billion
Operating as a professional employer organization (PEO) that serves over 8,000 companies with more than 120,000 worksite employees, Barrett Business Services (NASDAQ: BBSI) provides management solutions that help small and mid-sized businesses handle human resources, payroll, workers' compensation, and other administrative functions.
Why Does BBSI Give Us Pause?
- Revenue base of $1.20 billion puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 10.1 percentage points
- Waning returns on capital imply its previous profit engines are losing steam
Barrett is trading at $44 per share, or 19x forward P/E. If you’re considering BBSI for your portfolio, see our FREE research report to learn more.
CoreCivic (CXW)
Market Cap: $2.29 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 Is CXW Not Exciting?
- Products and services are facing end-market challenges during this cycle, as seen in its flat sales over the last five years
- Demand for its offerings was relatively low as its number of average available beds has underwhelmed
- Underwhelming 6.1% return on capital reflects management’s difficulties in finding profitable growth opportunities
CoreCivic’s stock price of $21.30 implies a valuation ratio of 17.3x forward P/E. Dive into our free research report to see why there are better opportunities than CXW.
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