A prudent investment decision involves buying well-performing stocks at the right time while selling those that are at risk. Rise in share price and strong fundamentals signal a stock’s bullish run.
Paychex, Inc. (PAYX - Free Report) is an outsourcing stock that has performed well so far this year and has the potential to sustain the momentum in the near term.
What Makes it an Attractive Pick?
An Outperformer: The company has outperformed the Zacks S&P 500 composite over the past year. The stock returned 4% compared with 1% increase recorded by the index.
Solid Zacks Rank: Paychex currently carries a Zacks Rank #2 (Buy). Our research shows that stocks with a Zacks Rank #1 (Strong Buy) or #2 offer attractive investment opportunities for investors. Thus, the company appears to be a compelling investment proposition at the moment.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Northward Estimate Revisions: The direction of earnings estimate revisions serves as an important pointer when it comes to the price of a stock. Over the past 60 days, the Zacks Consensus Estimate for Paychex’s fiscal 2019 and fiscal 2020 earnings have moved up by a penny each.
Positive Earnings Surprise History: Paychex has a decent earnings surprise history. Its earnings surpassed the Zacks Consensus Estimate in two of the previous four quarters, delivering average positive earnings surprise of 1.2%.
Strong Growth Prospects: The Zacks Consensus Estimate for fiscal 2019 earnings is pegged at $2.85, indicating year-over-year growth of 11.8%. Moreover, earnings are expected to register 8.2% growth in fiscal 2020. The stock has long-term expected earnings per share growth rate of 8.5%.
Driving Factors: Paychex is a cash rich company with a strong balance sheet. At the end of first-quarter fiscal 2019, Paychex had cash and cash equivalents of $440.1 million compared with $358.2 million at the end of the prior quarter. The company had no long-term debt to clear off. The significant amount of cash provides Paychex the flexibility to pursue any growth strategy in the form of strategic acquisitions and other related investments.
During fiscal 2018, Paychex completed the acquisitions of Lessor Group (“Lessor”) and HR Outsourcing Holdings, Inc. (“HROI”). While Lessor contributed less than 1% to Management Solutions revenues in first-quarter fiscal 2019, HROI contributed around 20% to total PEO and insurance services revenues. Collectively, both these acquisitions contributed nearly 4% to total revenues growth in first-quarter fiscal 2019.
Prior to this, the company had completed 13 acquisitions that helped it to expand services as well as global reach, thereby boosting its revenues.
Lower tax rates as a result of the tax reform policy (Tax Cuts and Jobs Act) is contributing to Paychex’s bottom line. The company’s first-quarter fiscal 2019 adjusted earnings of 67 cents per share improved 18% year over year. The company enjoyed a lower effective income tax rate of 24.5% in the last reported quarter compared with 34.1% in the prior-year quarter. For fiscal 2019, management is optimistic about the company’s bottom line and its tax rate. Adjusted earnings per share are estimated to be up approximately 11% and effective income tax rate is projected to be approximately 24%.
Reduced taxes will likely lead to greater retention of profits, thus helping the company to allocate more funds toward growth initiatives as well as reward shareholders through share buyback or increased dividend payments. Notably, in first-quarter fiscal 2019, the company repurchased 0.5 million shares for $32.8 million and paid $201.4 million in dividends. During fiscal 2018, Paychex repurchased shares worth $143.1 million and paid dividend of $739.7 million. Such moves indicate the company’s commitment to create value for shareholders and underline its confidence in its business.
Other Stocks to Consider
A few other top-ranked stocks in the broader Zacks Business Services sector are The Interpublic Group of Companies, Inc. (IPG - Free Report) , WEX Inc. (WEX - Free Report) and Automatic Data Processing Inc. (ADP - Free Report) , each carrying a Zacks Rank #2. Long-term expected EPS (three to five years) growth rates for Interpublic, WEX and Automatic Data Processing are 7.4%, 15% and 12.5%, respectively.
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