Business services providers play a critical role for enterprises, assisting them with everything from new hardware integrations to consulting and marketing. Furthermore, the demand for their offerings is rising as more clients outsource non-core functions, a trend that has enabled the industry to return 19.8% over the past six months. At the same time, the S&P 500 was up 11.7%.
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 two resilient services stocks at the top of our wish list and one we’re passing on.
One Business Services Stock to Sell:
CoStar (CSGP)
Market Cap: $12.84 billion
With a research department that makes over 10,000 property updates daily to its 35-year-old database, CoStar Group (NASDAQ: CSGP) provides comprehensive real estate data, analytics, and online marketplaces for commercial and residential properties in the U.S. and U.K.
Why Do We Think Twice About CSGP?
- Expenses have increased as a percentage of revenue over the last five years as its adjusted operating margin fell by 16.1 percentage points
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 10.8 percentage points
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
At $31.82 per share, CoStar trades at 20.2x forward P/E. Check out our free in-depth research report to learn more about why CSGP doesn’t pass our bar.
Two Business Services Stocks to Watch:
CoreCivic (CXW)
Market Cap: $3.33 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 Are We Fans of CXW?
- Annual revenue growth of 12.4% over the last two years was superb and indicates its market share increased during this cycle
- Demand for the next 12 months is expected to accelerate above its two-year trend as Wall Street forecasts robust revenue growth of 15%
- Performance over the past two years was turbocharged by share buybacks, which enabled its earnings per share to grow faster than its revenue
CoreCivic is trading at $33.73 per share, or 15.8x forward P/E. Is now a good time to buy? See for yourself in our full research report, it’s free.
Marsh (MRSH)
Market Cap: $89.94 billion
With roots dating back to 1871 and a presence in over 130 countries, Marsh (NYSE: MRSH) is a global professional services firm that helps organizations manage risk, strategy, and workforce challenges through its four specialized businesses.
Why Do We Like MRSH?
- 8.8% annual revenue growth over the last two years surpassed the sector average as its services resonated with customers
- Dominant market position is represented by its $27.95 billion in revenue and gives it fixed cost leverage when sales grow
- Strong free cash flow margin of 15.9% enables it to reinvest or return capital consistently, and its improved cash conversion implies it’s becoming a less capital-intensive business
Marsh’s stock price of $188.46 implies a valuation ratio of 17.1x forward P/E. Is now the time to initiate a position? Find out in our full research report, it’s free.
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