The outsourcing industry includes companies that are engaged in providing information technology, payroll, human resource, retirement and insurance services, business management solutions and business process outsourcing for small and mid-sized companies in the United States and abroad.
Increasing demand for expertise in improving efficiency and reducing costs is currently keeping the industry in good shape. Most of the companies are considering emerging technologies such as cloud computing and robotic process automation (RPA) to drive competitive advantage. This should help increase innovation, improve speed-to-market and drive performance within the industry.
The industry is labor intensive and heavily dependent on foreign talent. So, rising talent costs due to competition coupled with Trump’s stringent policies on immigration weigh on the its growth.
Considering this backdrop, it is not a bad idea to undertake a comparative analysis of two Outsourcing Services stocks— Automatic Data Processing ADP and Paychex, Inc. PAYX. While ADP has a market capitalization of $69.6 billion, the same for Paychex is $30.8 billion.
As the stocks carry a Zacks Rank #3 (Hold), 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.
So far this year, Paychex has performed impressively on the bourse compared with ADP and the industry. While Paychex has gained 32.3%, ADP and the industry rallied 23.5% and 24.5%, respectively.
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 25.1% compared with 11.8% for Paychex. For the next year, ADP’s expected earnings growth rate is 10.8% compared with Paychex’s 8.6%.
The long-term (three to five years) expected earnings per share growth rate for ADP is 13% and the same for Paychex is 9%.
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 over the past 60 days, ADP is better placed.
The Zacks Consensus Estimate for current-year earnings increased 1.1% for ADP and remained unchanged for Paychex. For the next year, the consensus estimate inched up 0.7% for ADP and 0.3% for Paychex over the past 60 days.
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 7.4% is higher than Paychex’s 1.6%.
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 28%, Paychex has a lead over ADP’s and the industry’s TTM net margins of 16.4% and 15%, respectively.
Comparing the companies with each other and the industry on the basis of price to forward 12 months’ earnings, we see that Paychex’s 27.81X is ahead of ADP’s 27.07X and the industry’s 22.63X.
Our comparative analysis shows that ADP scores over Paychex in terms of expected earnings growth, estimate revisions and earnings surprise history. Paychex has a lead in terms of TTM net margin. A faster share price rally led to higher valuation of the company.
Stocks to Consider
A few better-ranked stocks in the broader Zacks Business Services sector are WEX WEX and FLEETCOR Technologies FLT, each carrying a Zacks Rank #2 (Buy). The long-term expected EPS (three to five years) growth rate for WEX and FLEETCOR is 15% and 16.5%, respectively.
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