Why Sticky Services Inflation Could Lift These 3 Stocks

Key Points

• Services prices, tied to long-term contracts, wages, and rents, represent an often-overlooked inflation driver that could benefit certain companies.
• Republic Services uses CPI-linked long-term contracts to boost revenue and raised full-year guidance, with analysts projecting about 14% share upside.
• CoStar Group and CBRE Group offer differentiated commercial real estate exposure, with analysts projecting roughly 45% and 38% upside, respectively.

Energy price shocks and tariffs are two of the most talked-about factors driving inflation today, but it's easy for investors to miss another key catalyst: services prices. The services sector's breadth makes it uniquely relevant when prices are rising overall, and a handful of vital but often overlooked offerings are seeing increased pricing power alongside sustained commercial activity.

Companies operating in the waste management and commercial real estate industries could see higher prices that stay stickier than those in the energy sector. After all, energy prices can drop suddenly when supply improves, while services prices tend to be tied to longer-term contracts, wages, rents, and more. The three companies below provide different access points to the services industry but could all benefit from the current environment.

Republic's Business Model Rewards Inflation With Long-Term Contract Boosts

Republic Services Inc. NYSE: RSG is one of the largest providers of solid waste management services in the country. This defensive industry is typically characterized by recurring demand, thanks to long-term city and commercial contracts. Often, these contracts include annual price increases tied to the Consumer Price Index (CPI).

As contract rates reset higher, Republic's revenue can rise—even while the number of customers or the volume of waste collected remains essentially flat. This is a huge benefit for investors compared with some cyclical commodity producers that require surges in physical volumes to actually capitalize on higher prices.

The other advantage for Republic in the current climate is that it can benefit from inflated prices over the longer term, even if those prices don't remain elevated, thanks to its long-term contracts.

Last quarter, the company boosted revenue by 4.6% year over year (YOY) while maintaining its EBITDA margin. This was enough to motivate management to increase the company's full-year guidance, including an expectation that adjusted free cash flow could reach as high as $2.58 billion. Sizable cash flow will help the company to continue its aggressive acquisition plan.

Analysts do see significant upside for Republic, anticipating that shares could climb by 14%. On top of this, investors get the added bonus of a stable dividend yielding 1.25%.

CoStar's Commercial Real Estate Data May Grow When Services Demand Is Strong

A combination of higher mortgage rates, squeezed consumers, and inflated prices has introduced new volatility to the residential real estate market. However, commercial real estate remains differentiated, and CoStar Group Inc. NASDAQ: CSGP offers a unique play in this corner of the industry.

CoStar offers data, analytics, and marketplace platforms for commercial real estate, positioning the company to benefit as transaction activity across different parts of the market picks up. To the extent that persistent inflation in the services environment indicates resilient demand for services, this may also suggest business expansion, leasing activity, and demand for commercial real estate information could also pick up.

The company's last earnings report was mixed—though earnings beat analyst estimates, revenue growth was somewhat shy of predictions (despite rising by more than 18% YOY). Crucially, profitability is improving, and adjusted EBITDA more than doubled YOY for that period.

In addition to CoStar's core commercial real estate business, the company has a growing residential marketplace. Despite challenges to the residential market, CoStar's Homes.com platform is scaling and provides the company with an important means of building exposure to another part of the industry.

Down about 59% year to date (YTD), CSGP shares are expected by analysts to rise by about 45% to reach the consensus price target of $40.11.

A Broad Commercial Real Estate Play Benefitting From the Needs of the Services Industry

CBRE Group Inc. NYSE: CBRE is a broad commercial real estate services firm, offering property management, leasing, capital markets, and more.

This distinguishes it from CoStar above, even as it can benefit from some of the same growth drivers. Services-sector businesses require space, advisers, leasing, and other products that CBRE offers. In this way, the company can also directly benefit from growth in services companies.

The benefit to CBRE is that it does not require a particular property type or transaction category in order to see top-line benefits. It has a massive geographic footprint, and it offers a host of different services, making it well-diversified.

At the same time, CBRE shares are down only about 19% YTD, less than CoStar, and the company still has a projected 38% upside, according to Wall Street analysts, alongside a solid seven Buy ratings compared to a single Hold.