Paychex, Inc. PAYX has performed well so far this year and has the potential to sustain the momentum in the near term. Consequently, if you have not taken advantage of its share price appreciation yet, it’s time you add the stock to your portfolio.
What Makes It an Attractive Pick?
An Outperformer: Shares of Paychex have returned 26% year to date, outperforming the 22.5% rally of the industry it belongs to and 16% rise of the Zacks S&P 500 composite.
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. You can see the complete list of today’s Zacks #1 Rank stocks here.
Northward Estimate Revisions: The direction of estimate revisions serves as an important pointer when it comes to the price of a stock. The Zacks Consensus Estimate for fiscal 2020 and 2021 earnings has increased 0.3% each over the past 60 days.
Positive Earnings Surprise History: Paychex has a decent earnings surprise history. Its earnings surpassed the Zacks Consensus Estimate in two of the preceding four quarters, with the average positive surprise being 0.8%.
Strong Growth Prospects: The Zacks Consensus Estimate for second-quarter fiscal 2020 earnings is pegged at 68 cents, indicating growth of 4.6% from the year-ago quarter reported figure. Moreover, earnings in fiscal 2020 and 2021 are expected to register 9.2% and 7.9% growth, respectively, from the year-ago reported figures. The company has a long-term expected EPS (three to five years) growth rate of 9%.
Growth Factors: Paychex looks strong on the back of its solid top-line growth and dominant position in the outsourcing market. Notably, in the last five fiscals, i.e. 2014 to 2019, the company saw its revenues rise at a CAGR of 6.6%. We believe that Paychex’s acquisitions have expanded its capabilities, customer base, and generated cost and revenue synergies, thereby creating shareholder value. Apart from boosting revenue accretion, the deals have historically benefited the company’s operating margin while also resulting in tax synergies. Further, the company is looking to capitalize on the rising opportunities in the professional employer organization (PEO) industry.
Effective management execution has helped Paychex build cash and cash equivalents of $586.4 million as of Aug 31, 2019. The company continues to use excess cash to aggressively buy back shares and pay out dividends. During first-quarter fiscal 2020, the company paid $222 million in dividends and repurchased shares worth $171.9 million. During fiscal 2019, Paychex paid out dividend of $826.8 million and repurchased shares worth $56.9 million.
We believe that this solid cash position will not only help Paychex pursue any growth strategy in the form of strategic acquisitions and other related investments but also continue rewarding shareholders.
Other Stocks to Consider
Some other top-ranked stocks in the broader Zacks Business Services sector are Blucora BCOR, Booz Allen Hamilton BAH and S&P Global SPGI. While Blucora and Booz Allen Hamilton sport a Zacks Rank #1, S&P Global carries a Zacks Rank #2. Long-term expected EPS (three to five years) growth rate for Blucora, Booz Allen Hamilton and S&P Global is 20%, 13% and 10%, respectively.
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