America's Business & Information Services Sector In Focus: Goldman Sachs Keeps Buy On Cintas, Gartner & More

Goldman Sachs analyst George K. Tong expects companies in America's Business & Information Services sector to lean into technology and innovation to bolster their competitive positioning and drive internal efficiencies against a tenuous external backdrop.

The Business & Information Services sector increased an average of 20.8% in 2023, below that of the S&P 500's 24.2% increase, with Information Services advancing 25.0% and Business Services up 15.3%, the analyst notes. 

Lower inflation and interest rates toward the back half of the year should drive improved B2B spending and consumer credit trends, the analyst writes. 

While the Business and Info Services sector has disparate exposure to end markets, business models, and service offerings, the best companies have commonalities of scale, essentialness of services, oligopolistic market structures, and pricing power.

Looking ahead to 2024, the analyst has a positive outlook for organic revenue growth in the Info Services sector, with Business Services growth likely to be more muted, per the analyst.

In FY24, the analyst forecasts Info Services average EBITDA margins to be a healthy 39.3% in 2024, almost twice that of Business Services at 21.1%, due to low human capital intensity and operating leverage.

The analyst reiterated a Buy rating on Cintas Corporation CTAS, with a price target of $673.

According to the analyst, CTAS will continue to deliver attractive organic revenue growth that comes structurally above pre-COVID levels, as well as operating margin expansion from efficiencies involving equipment, labor, energy, and routing.

Tong reiterated a Buy rating on CoStar Group, Inc. CSGP, with a price target of $98. 

The analyst projects EBITDA margins to expand meaningfully from 20% in 2023 to 40% by 2027, driven by operating leverage as the residential business scales. 

The analyst maintained a Buy rating on Fair Isaac Corporation FICO, with a price target of $1,289. 

The analyst sees a healthy valuation upside at FICO driven by pricing power in its Scores business that can insulate the company from macro and credit volume volatility, healthy margin flow-through from pricing actions, and further progress with the Software platform transformation fueling ongoing double-digit ARR growth. 

Tong reiterated a Buy rating on Gartner, Inc. IT with a price target of $445.

According to the analyst, Gartner's resilient Research CV growth trends, backed by the essentialness of its products, proprietary data, and large unvented market, and structural step-up in margins from pre-COVID levels due to newfound efficiencies, will drive attractive valuation upside in the shares. 

Tong maintained a Buy rating on S&P Global Inc. SPGI with a price target of $483.

SPGI will continue to benefit from its diversified revenue mix, which insulates the business from debt issuance volatility, and view its revenue and cost synergies as idiosyncratic drivers of earnings growth and valuation upside, Tong notes.

Tong reiterated the Sell rating on H&R Block, Inc. HRB, with a price target of $34.

The company has a muted outlook for the 2024 tax season, including industry volume growth of ~1% with flat assisted growth and modest DIY growth reflecting the secular shift from assisted to DIY, he analyst notes.

The analyst maintained the Sell rating on Robert Half Inc. RHI, with a price target of $64.

Revenue y/y declines in September and October worsened from 3Q overall, and guidance points to further deterioration in the rate of revenue decline in 4Q. While weekly sequential rates of revenue decline at RHI have narrowed over the past quarter, they have yet to fully stabilize, the analyst writes.

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