2 Services Stocks to Keep an Eye On and 1 We Avoid

Business services providers thrive by solving complex operational challenges for their clients, allowing them to focus on their secret sauce. Furthermore, the demand for their offerings is rising as more clients outsource non-core functions, a trend that has enabled the industry to return 14.9% over the past six months, almost identical to 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. With that said, here are two services stocks we think can generate sustainable market-beating returns and one we’re steering clear of.

One Business Services Stock to Sell:

Robert Half (RHI)

Market Cap: $3.59 billion

With roots dating back to 1948 as the first specialized recruiting firm for accounting and finance professionals, Robert Half (NYSE:RHI) provides specialized talent solutions and business consulting services, connecting skilled professionals with companies across various fields.

Why Do We Think RHI Will Underperform?

1. Sales were flat over the last five years, indicating it’s failed to expand this cycle
2. Sales over the last five years were less profitable as its earnings per share fell by 11.3% annually while its revenue was flat
3. Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability

Robert Half’s stock price of $35.93 implies a valuation ratio of 15.9x forward P/E. If you’re considering RHI for your portfolio, see our FREE research report to learn more.

Two Business Services Stocks to Watch:

EXL (EXLS)

Market Cap: $7.14 billion

Originally founded as an outsourcing company in 1999 before evolving into a technology-focused enterprise, EXL (NASDAQ:EXLS) provides data analytics and AI-powered digital operations solutions that help businesses transform their operations and make better decisions.

Why Is EXLS a Top Pick?

1. Impressive 15.1% annual revenue growth over the last five years indicates it’s winning market share this cycle
2. Share repurchases over the last five years enabled its annual earnings per share growth of 25.5% to outpace its revenue gains
3. Strong free cash flow margin of 11.5% enables it to reinvest or return capital consistently

EXL is trading at $44.08 per share, or 22.4x forward P/E. Is now the time to initiate a position? Find out in our full research report, it’s free.

IMAX (IMAX)

Market Cap: $1.67 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 Are We Positive On IMAX?

1. Incremental sales over the last two years have been highly profitable as its earnings per share increased by 34.3% annually, topping its revenue gains
2. Free cash flow margin jumped by 26.4 percentage points over the last five years, giving the company more resources to pursue growth initiatives, repurchase shares, or pay dividends
3. Returns on capital are increasing as management’s prior bets are starting to bear fruit

At $31.01 per share, IMAX trades at 24.1x forward P/E. Is now the right time to buy? See for yourself in our full research report, it’s free.

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