The outsourcing industry is currently benefitting from higher demand for expertise to improve efficiency and reduce costs.
Post the 2017 tax reform, the U.S. outsourcing companies are increasingly allocating tax savings toward investments in digital and artificial intelligence as well as cloud and blockchain. This is enhancing their service quality and spurring demand.
Considering this backdrop, it is not a bad idea to undertake a comparative analysis of two Outsourcing Services stock — Automatic Data Processing (ADP - Free Report) and Paychex, Inc. (PAYX - Free Report) . While ADP has a market capitalization of $55.9 billion, the same for Paychex is $23.1 billion.
As the stocks carry a Zacks Rank #2 (Buy), we are using other parameters to provide investors a better insight.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
ADP has performed impressively on the bourse year to date compared with Paychex and the industry. While ADP’s shares have gained 10.7%, the same for Paychex declined 4.2%. The industry inched down 2.9% in the same time frame.
Earnings growth along with stock price gains is often an indication of a company’s strong prospects.
ADP’s current year earnings are projected to grow 21.2% compared with 12.2% for Paychex. For the next year, ADP’s expected earnings growth rate is 12.7% compared with Paychex’s 6.8%. Thus, ADP has an edge in terms of current year as well as next year expected earnings growth.
The long-term (three to five years) expected earnings per share growth rate for ADP is 12.5% and the same for Paychex is 8.8%.
Earnings Estimate Revisions
The direction of estimate revisions is an important pointer when it comes to the price of a stock. Based on current-year and next-year earnings estimate revisions in the last 60 days, ADP is better placed.
The Zacks Consensus Estimate for current year earnings increased 1.7% for ADP and 0.4% for Paychex. For fiscal 2020, the consensus estimate inched up 0.7% for ADP but declined 0.6% for Paychex.
Earnings Surprise History
The earnings surprise history of a stock provides investors an idea of the stock’s performance in the previous quarters.
ADP and Paychex have an impressive trailing four quarter earnings surprise history. However, ADP delivered average positive earnings surprise of 7% compared with Paychex’s 2%.
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 26.4%, Paychex has a lead over ADP’s and the industry’s TTM net margins of 12.2% and 15.1%, respectively.
Comparing the companies with each other and the industry on the basis of price to forward 12 months’ earnings, we see that ADP’s 23.18X is ahead of Paychex’s 21.93X and the industry’s 18.16X.
So, ADP looks expensive compared with Paychex and the industry.
Our comparative analysis shows that ADP scores over Paychex in terms of price performance, expected earnings growth, estimate revisions and earnings surprise history. However, a faster share price rally led to higher valuation of the company. Paychex is superior in terms of TTM net margin.
Other Stocks to Consider
A few other top-ranked stocks in the broader Zacks Business Services sector are Interpublic (IPG - Free Report) and Navigant Consulting (NCI - Free Report) , each carrying a Zacks Rank #2 (Buy). Long-term expected EPS (three to five years) growth rate for Interpublic and Navigant are 7.4% and 13.5%, respectively.
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