Paychex (PAYX) to Report Earnings in Q2: What’s in Store?

Paychex Inc. PAYX is set to report second-quarter fiscal 2016 results on Dec 22. Last quarter, the payroll and human resource solutions provider posted a positive earnings surprise of 1.96%. It is worth noting that the company has outperformed the Zacks Consensus Estimate in two out of the four preceding quarters with an average positive earnings surprise of 1.03%.

Let us see how things are shaping up for this announcement.

Factors at Play

We are encouraged by Paychex’s investments in product development and focus on building its sales force to support revenue growth. We also believe that the company’s expansionary initiatives, such as joint ventures and acquisitions, support its long-term growth strategy.

Product launches are expected to provide additional support. Moreover, Paychex’s focus on small- and mid-sized businesses looking for HR solutions could provide growth opportunities.

However, unfavorable interest rates and competition from Automatic Data Processing ADP and Insperity remain the headwinds.

Earnings Whispers

Our proven model does not conclusively show that Paychex will beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP: Both the Most Accurate estimate and the Zacks Consensus Estimate stand at 51 cents. Hence, the difference is 0.00%.

Zacks Rank: Paychex’s Zacks Rank #3 when combined with a 0.00% ESP makes surprise prediction difficult.

We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Stocks to Consider

Here are a couple of companies, which you may consider as our model shows that they have the right combination of elements to post an earnings beat in their upcoming releases:

Carnival Corporation CCL, with an Earnings ESP of +12.20% and a Zacks Rank #3.

NIKE Inc. NKE, with an Earnings ESP of +2.35% and a Zacks Rank #3.

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