Paychex Inc. (PAYX - Snapshot Report) is set to report first-quarter fiscal 2017 results on Sep 28. Last quarter, the payroll and human resource solutions provider’s earnings were in line with the Zacks Consensus Estimate.
In the past four quarters, the company outperformed the Zacks Consensus Estimate twice and matched the same on two occasions. This represents an average positive earnings surprise of 0.98%.
Let’s see how things are shaping up for this announcement.
Factors at Play
We are encouraged by Paychex’s investments in product development and focus on boosting sales force to drive revenues. We also believe that the company’s expansion initiatives, including joint ventures and acquisitions, are in sync with its long-term growth strategy.
One of the key secular growth drivers for Paychex is demand for outsourcing. Human Resource Services outsourcing is a large, less-than-half-penetrated market that offers significant cost-cutting potential. Moreover, growing regulatory burden on small companies underscores the increasing need for outsourcing non-core activities.
The company continues to capitalize on this opportunity by regularly introducing new products and services for upselling and moving into the mid-market, which should boost results in the to-be-reported quarter.
Going further, we are optimistic that Paychex might witness growth by successfully cross-selling newer products such as Paychex Premier, Major Market Services (MMS) and ancillary HRS products such as 401(k) record keeping, health insurance sales and workers' compensation administration to the existing client base. This strategy is likely to positively impact the company’s fiscal first-quarter results.
However, sluggish economic growth and a possible rise in interest rates remain concerns. Moreover, intense competition in the outsourcing space from major players like Automated Data Processing Inc. (ADP - Analyst Report) and Insperity could add to its woes.
Our proven model does not conclusively show that Paychex will beat on earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below:
Zacks ESP: Both the Most Accurate estimate and the Zacks Consensus Estimate stand at 57 cents. Hence, the difference is 0.00%.
Zacks Rank: Paychex carries a Zacks Rank #3, which increases the predictive power of ESP. However a 0.00% ESP makes surprise prediction difficult.
We caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.
Stocks to Consider
Here are a couple of stocks that you may consider as our model shows that they have the right combination of elements to post an earnings beat in their upcoming releases:
Actuant Corporation (ATU - Analyst Report) with Earnings ESP of +3.45% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.
Carnival Corporation (CCL - Analyst Report) with Earnings ESP of +0.53% and a Zacks Rank #3.
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