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Is Paychex's (PAYX) Place in Your Portfolio Justified?

Zacks Equity Research
Updated

At times, it is prudent to hold on to certain stocks that have enough potential but are weighed down by tough market conditions.Paychex Inc. PAYX seems to be one such stock, which investors should hold on to if they are looking to reap long-term benefits. Though the stock is facing a few headwinds at the moment, these are transitory in nature. There is enough scope for this Zacks Rank #3 (Hold) company to rebound in the long run.

Notably, the stock has returned 9.9% in the last three months, outperforming 7.3% growth recorded by the industry.

Growth Drivers

There were a plenty of reasons behind the company’s upsurge, which includes a better-than-expected first-quarter result and upbeat fiscal 2018 guidance.

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The company reported non-GAAP earnings per share of 62 cents, which beat the Zacks Consensus Estimate by a couple of cents and grew 11% year over year. The upside mainly stemmed from higher revenues and efficient cost management.

Paychex reported total revenues (including interest on funds held for clients) of $816.8 million, up 4% year over year. Excluding interest on funds held for its clients, total services revenues (Payroll service and Human Resource Services) ascended 4% year over year to $803.1 million. The Zacks Consensus Estimate was pegged at $816 million.

Buoyed by splendid fiscal first-quarter results, the company raised revenue outlook. The company now anticipates total revenues to jump 6%, up from the previous estimate of 5%. This translates to revenues of $3.34 billion, which is higher than the Zacks Consensus Estimate of $3.31 billion.

Human Resource Services revenues are now projected to grow in the range of 12-14%, up from 8-10% projected earlier.

All other guidance provided during fourth-quarter fiscal 2017 results remained unchanged. Non-GAAP earnings per share are estimated to be up in the range of 7-8%, which comes to $2.35-$2.38. The Zacks Consensus Estimate is currently pegged at $2.37.

Going forward, Paychex’s investments in product development, technology and focus on building its sales force to support revenue growth boost optimism. We also believe the company’s expansion initiatives, such as joint ventures and acquisitions, are likely to support its long-term growth strategy.

Product launches are likely to be the other growth drivers. Further, Paychex’s focus on small and mid-sized businesses looking for HR solutions could provide growth opportunities.

Additionally, its continuous share buybacks bode well for investors. The company has an expected EPS growth rate of 7.8%. Notably, the stock has delivered positive earnings surprises in the trailing four quarters with an average beat of 2.2%.

Risks Persist

However, unfavorable interest rates and competition from Automatic Data Processing ADP and Insperity NSP remain key concerns.

Our Take

We expect the aforementioned factors to help the company sustain strong momentum and stay afloat amid difficult times. Consequently, we suggest that investors hold on to the stock for the time being.

A better-ranked stock worth considering is Applied Materials, Inc. AMAT. sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Applied Materials has a long-term expected EPS growth rate of 17.1%.

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Cybersecurity stocks spiked on recent news of a data breach affecting 143 million Americans. But which stocks are the best buy candidates right now? And what does the future hold for the cybersecurity industry?

Equifax is just the most recent victim. Computer hacking and identity theft are more common than ever. Zacks has just released Cybersecurity! An Investor’s Guide to inform Zacks.com readers about this $170 billion/year space. More importantly, it highlights 4 cybersecurity picks with strong profit potential.

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Applied Materials, Inc. (AMAT) : Free Stock Analysis Report
 
Insperity, Inc. (NSP) : Free Stock Analysis Report
 
Automatic Data Processing, Inc. (ADP) : Free Stock Analysis Report
 
Paychex, Inc. (PAYX) : Free Stock Analysis Report
 
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