3 Services Stocks That Fall Short

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 7.7% return has trailed the S&P 500 by 2.5 percentage points.

Investors should tread carefully as many of these companies are also cyclical, and any misstep can have you catching a falling knife. On that note, here are three services stocks we’re steering clear of.

GEO Group (GEO)

Market Cap: $2.15 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 Are We Out on GEO?

1. Muted 1.1% annual revenue growth over the last five years shows its demand lagged behind its business services peers
2. Day-to-day expenses have swelled relative to revenue over the last four years as its adjusted operating margin fell by 6.6 percentage points
3. Free cash flow margin shrank by 11.7 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive

At $15.72 per share, GEO Group trades at 13.7x forward P/E. To fully understand why you should be careful with GEO, check out our full research report (it’s free).

Rogers (ROG)

Market Cap: $1.81 billion

With roots dating back to 1832, making it one of America's oldest continuously operating companies, Rogers (NYSE:ROG) designs and manufactures specialized engineered materials and components used in electric vehicles, telecommunications, renewable energy, and other high-performance applications.

Why Do We Think ROG Will Underperform?

1. Customers postponed purchases of its products and services this cycle as its revenue declined by 7% annually over the last two years
2. Performance over the past five years shows each sale was less profitable, as its earnings per share fell by 15.7% annually
3. Free cash flow margin dropped by 5.4 percentage points over the last five years, implying the company became more capital intensive as competition picked up

Rogers’s stock price of $99.14 implies a valuation ratio of 31.6x forward P/E. Dive into our free research report to see why there are better opportunities than ROG.

TransUnion (TRU)

Market Cap: $13.12 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 Does TRU Give Us Pause?

1. Costs have risen faster than its revenue over the last five years, causing its adjusted operating margin to decline by 2.9 percentage points
2. Free cash flow margin dropped by 9.7 percentage points over the last five years, implying the company became more capital intensive as competition picked up
3. Below-average returns on capital indicate management struggled to find compelling investment opportunities, and its decreasing returns suggest its historical profit centers are aging

TransUnion is trading at $68.99 per share, or 16.6x forward P/E. If you’re considering TRU for your portfolio, see our FREE research report to learn more.

Stocks We Like More

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