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PAYX or BR: Which of These is a Better Outsourcing Stock?

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Outsourcing is the business of transferring the control of certain operations, services or processes (which were previously done by the company’s internal staff and resources) to external resources or third-party contractors. A company may choose to outsource its operations for several reasons such as to reduce and control operating costs, increase focus on its core business competencies, thereby improving efficiency, strengthening its market share and getting access to better external resources. To avoid government rules and regulations, outsourcing is also adopted.

Per a report by statista, the global outsourcing industry generated $88.9 billion in revenues in 2017. The outsourcing trends are expected to be more favorable going ahead in 2018 on a worldwide basis. The buoyancy in the outsourcing space is further confirmed by its Zacks Industry Rank in the top 37% (95 out of the 250 plus groups).

Given this backdrop, it is not a bad idea to undertake a comparative analysis of two Outsourcing Services stocks — Broadridge Financial Solutions Inc. (BR - Free Report) and Paychex, Inc. (PAYX - Free Report) . Both the stocks are part of the broader Business Services sector (one of the 16 Zacks sectors). While Broadridge has a market capitalization of $13.57 billion, Paychex’s market cap is $24.56 billion.

Zacks Rank & Style Score

Currently, both the stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

However, with a VGM Score of B, Broadridge enjoys an edge over Paychex in terms of investment attractiveness. Paychex has a VGM Score of D. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores.

Our research shows that stocks with a VGM Score of A or B when combined with a Zacks Rank #1 (Strong Buy) or 2 offer the best investment opportunities for investors.

Price Performance

Broadridge clearly scores over Paychex in terms of price performance. Shares of Broadridge have gained 53% in a year’s time, outperforming the industry’s rally of 24.8%. Paychex, despite rallying 20.9% in the same time frame, underperformed both Broadridge and the industry it belongs to.

 

Earnings Expectations

Earnings growth along with stock price gains is often an indication of a company’s strong prospects.

Paychex’s current-quarter earnings are projected to grow 11.3% compared with 9.9% for Broadridge.  For 2019, Paychex’s earnings are expected to register 10.9% growth compared with 6.9% for Broadridge.

Thus, Paychex has an edge over Broadridge in terms of quarterly and yearly projected earnings growth.

Earnings Surprise History

The earnings surprise history of a stock helps investors have an idea of the stock’s performance in the previous quarters.

Broadridge has performed better than Paychex, having surpassed the Zacks Consensus Estimate in three of the previous four quarters, delivering an average beat of 23.6%. Paychex delivered a positive surprise in two of the prior four quarters with an average beat of 1.2%.

Net Margin

Net profit margin helps investors evaluate a company’s business model in terms of pricing policy, cost structure and operating efficiency, and shows how good it is at converting revenues into profits. Hence, a strong net profit margin is preferred by all classes of investors.

With a TTM net margin of 27.6%, Paychex not only compares favorably with the industry’s figure of 11.8% but also has a lead over Broadridge’s 9.4% TTM net margin. Broadridge does not compare favorably with the industry in terms of TTM net margin.

Valuation

The Price to Earnings Ratio (P/E) metric is used to measure a company's value relative to its earnings. In general, a lower number or multiple is usually considered better than a higher one.

The trailing 12-month price-to-earnings multiple for Broadridge and Paychex is 28.5 and 27.9, respectively, while that of the industry is 27.5. Although both the companies are overvalued relative to the industry, Paychex has an edge with a lower P/E ratio. 

Bottom Line

Our comparative analysis shows that Broadridge scores over Paychex in terms of price performance and earnings surprise history. Paychex, however, has an edge in terms of expected earnings growth and net margin. Although both companies carry a Zacks Rank #2, Broadridge, with a better style score, has a higher probability of success in the near term. However, a faster share price rally in the past year has led to a relatively rich valuation for Broadridge compared to Paychex.

Other Stocks to Consider

Some other top-ranked stocks in the broader Business Services sector include Automatic Data Processing, Inc. (ADP - Free Report) , The Dun & Bradstreet Corporation (DNB - Free Report) and FLEETCOR Technologies, Inc. (FLT - Free Report) . While Automatic Data Processing and Dun & Bradstreet sport a Zacks Rank #1, FLEETCOR carries a Zacks Rank #2.

The long-term expected earnings per share (three to five years) growth rate for Automatic Data Processing, Dun & Bradstreet Corporation and FLEETCOR Technologies is 11.3%, 6% and 16.5%, respectively.

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