1 Services Stock with Competitive Advantages and 2 We Turn Down
Business services providers use their specialized expertise to help enterprises streamline operations and cut costs. But cutbacks in corporate spending and the threat of new AI products have kept sentiment in check, and over the past six months, the industry’s 6.4% return has trailed the S&P 500 by 2.1 percentage points.
The elite companies can churn out earnings growth under any circumstance, however, and our mission at StockStory is to help you find them. Keeping that in mind, here is one services stock poised to generate sustainable market-beating returns and two we’re swiping left on.
Two Business Services Stocks to Sell:
GEO Group (GEO)
Market Cap: $4.01 billion
With a global footprint spanning three continents and approximately 81,000 beds across 100 facilities, GEO Group (NYSE:GEO) operates secure facilities, processing centers, and reentry services for government agencies in the United States, Australia, and South Africa.
Why Does GEO Worry Us?
- Annual revenue growth of 3.3% over the last five years was below our standards for the business services sector
- Efficiency has decreased over the last five years as its adjusted operating margin fell by 4 percentage points
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 11.1 percentage points
At $30.87 per share, GEO Group trades at 22.8x forward P/E. If you’re considering GEO for your portfolio, see our FREE research report to learn more.
First Advantage (FA)
Market Cap: $3.83 billion
Processing over 200 million screens annually across more than 200 countries and territories, First Advantage (NASDAQ:FA) provides employment background screening, identity verification, and compliance solutions to help companies manage hiring risks.
Why Is FA Not Exciting?
- Earnings growth over the last four years fell short of the peer group average as its EPS only increased by 1.6% annually
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 7.9 percentage points
- ROIC of 1.1% reflects management’s challenges in identifying attractive investment opportunities, and its decreasing returns suggest its historical profit centers are aging
First Advantage’s stock price of $23.02 implies a valuation ratio of 17.7x forward P/E. Read our free research report to see why you should think twice about including FA in your portfolio.
One Business Services Stock to Watch:
Aramark (ARMK)
Market Cap: $14.84 billion
From serving hot dogs at major league stadiums to managing college dining halls that feed thousands daily, Aramark (NYSE:ARMK) provides food services and facilities management to schools, healthcare facilities, businesses, sports venues, and correctional institutions across 16 countries.
Why Are We Fans of ARMK?
- Annual revenue growth of 13.3% over the last five years was superb and indicates its market share increased during this cycle
- Massive revenue base of $19.41 billion makes it a well-known name that influences purchasing decisions
- Additional sales over the last five years increased its profitability as the 26.5% annual growth in its earnings per share outpaced its revenue
Aramark is trading at $56.45 per share, or 23.1x forward P/E. Is now the right time to buy? Find out in our full research report, it’s free.
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